I thought the activity in class with the Pemberton general stores situation was very interesting. Getting into groups, we had to start off by figuring out which decision had the best outcome, expecting that the other team would do the same. We figured out that if we stayed closed, there was a chance that we'd get a profit if the other store stayed closed as well, but if the other team opened, we were losing double what we would if we decided to stay open. Even if they stayed open as well, then we would both lose $20,000, and if they closed then we would profit $40,000. We decided that opening in the first 4 rounds, until we had a chance to discuss with them, would be to our best benefit. We did this, and they had decided to do the same, landing us both in debt after the first 4 rounds. When we got to discuss, we decided to trust each other and both stay closed the rest of the weeks, that way we would both profit the $20,000 a week. We both held our ends of the deal and we ended in profit of something like $160,000.
So what did this show us? Well, then we went back and talked about a simple jail situation, as a representation of our store activity, which easily explained what the rational person would do according to the expected value analysis. If the two parties cooperate with each other, you will come out on top. But you don't know what the other person is going to do, so you will most likely compete because you won't lose as much if you compete and they compete, as if they compete and you don't. If both parties act "rationally" there will be what we talked about as "mutual destruction" because they will both compete. If you don't trust you competition and or make a deal with them to cooperate together, you're better off competing.
I believe that the most crucial aspect of this exercise was the collaboration and negotiation that occurred at the end of the rounds. The collaboration allowed for the maximum amount of profit to be made. This was illustrated through the act of staying closed through the rest of rounds. The game theory problem relies on an equilibrium based on the most rational answers. This makes collaboration easy because it can be safe to assume that both businesses want the most profit they can possibly make.
ReplyDeleteI thought this was an interesting activity that we did. It showed how well people were able to stick to a plan. Some people decided that they should be fair to the other team (store) and make equal profits while others thought to maximize their profit and cause the other team to lose money. This was an excellent way to illustrate the game theory in class.
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