### Suggestions for incremental change to game theory courses, drawn from the ten building blocks of Economy Studies.

## General approach

Change often happens incrementally and slowly. In the economics textbook market, for example, there is an unwritten rule that new textbooks cannot differ more than roughly 15% from the standard textbook in order to be ‘acceptable’ (Colander, 2003).

While our book clearly breaks this rule and proposes more far-reaching and fundamental changes in most chapters, in this chapter we focus instead on how existing courses could be adjusted incrementally. By doing so, we hope to assist educators in improving and adapting the courses they teach without needing to rip them up and start again, as well as helping students make suggestions for how this could be done.

First, we set out the typical contents of current courses. Second, we provide our suggested additions and changes. It is important to note that we pose all these suggestions as potential sources of inspiration, not a checklist of all the things that necessarily should be included. After all, there is a practical limit to what can be taught within a single course.

Courses:

## Typical contents of current courses

Game theory courses, sometimes also called strategy or decision theory courses, are about the formal modelling of conflict and cooperation. The teaching focuses on making students work with mathematical models of ‘strategic interaction’ between rational actors that calculate what their best option is, often meaning the one that maximizes their individual utility. A wide variety of such models have been developed which are intended to be applied in different situations. These range from static to dynamic games, games with complete to imperfect information, single to repeated games, cooperative to non-cooperative games, and zero-sum to non-zero-sum games. Sometimes evolutionary game theory and market design, with auction and matching theory, are also included. Insights from behavioral economics are increasingly included in game theory courses and sometimes the two are integrated in one course. For the sake of clarity we discuss the two separately, here game theory and below behavioral economics.

Frequently used textbooks:

*Game Theory: An Introduction*by Steven Tadelis*Game Theory: A Multi-Leveled Approach*by Hans Peters*Strategy: An Introduction to Game Theory*by Joel Watson*Introduction to Game Theory*by Osborne Martin*Game Theory*by Michael Maschler, Eilon Solan, and Shmuel Zamir*Game Theory 101: The Complete Textbook*by William Spaniel*Strategy and Game Theory*by Felix Munoz-Garcia and Daniel Toro-Gonzalez

## Suggested additions and changes

### Practical skills and real-world knowledge

Our main advice for game theory courses is to pay more attention to their real world application and relevance, and devote less time to mathematical sophistication and techniques. As with other courses, this is important because only a very small minority of students will go on to do academic research, and even fewer will work to produce mathematical proofs. The vast majority of students will become professional economists and in doing so need skills in proper practical application.

What would this mean for the course? It would mean spending less time on teaching and examining mathematical skills, and devote more attention to practical application with real world examples, case studies, and assignments in which students themselves have to analyse an actual societal problem. Here it is important that the goal of explanations and assignments also change. The goal of analysing a case is not (just) to demonstrate the theory or technique, but (also) to understand the real world case itself better with the help of the theory and technique. The two are always related to each other, but currently the emphasis is on the former and therefore we propose to put more attention on the latter. By learning more about actual cases students can learn better how to apply techniques in a proper manner, taking into account the context. Furthermore, it is a better way of making them realize and get to know the limitations of the approach, seeing what parts of reality it is able to capture and which not.

For more detail, see *Building Block 2: Know Your Own Economy *and *Building Block 9: Problems & Proposals.*

### A range of analytical tools and approaches

Game theory focuses on how rational actors behave in strategic situations. Insights from behavioral economics, which emphasizes the cognitive limitations of human beings, are increasingly incorporated in game theory courses. We applaud this development and encourage teachers to actively collaborate with psychologists in their courses to help students get a better understanding of how the human mind and human behavior work. To understand economic behavior and decision making, social aspects are however also crucial. Game theory could thus benefit from bringing in insights from perspectives that focus on these social aspects of the economy, such as institutional, social network, field and cultural economics.

For more details, see the background materials *Interdisciplinary Economics *and *Economic Approaches*.

**Teaching Materials**

*Game theory: A critical introduction*by Shaun Hargreaves-Heap and Yanis Varoufakis, from 2004. This useful book introduces students to game theory and its various aspects from dynamic, bargaining, repeated and evolutionary games, while also drawing attention to its core assumptions and the societal implications.*The handbook of economic sociology*by Neil J. Smelser & Richard Swedberg, most recent edition from 2010. This extensive and yet accessible book for non-sociologists, provides an impressive and useful overview of the field of economic sociology.*Principles of Economic Sociology*by Richard Swedberg, from 2003. An insightful introduction into economic sociology, with chapters devoted to different theories and topics, such as firms, markets, consumption, law and gender.*Economic Anthropology: History, Ethnography, Critique*by Chris Hann and Keith Hart, from 2011. This useful introduction into economic anthropology helps students understand how the field emerged and evolved, and what its different strands and key insights on different world regions are.*A handbook of economic anthropology*by James G. Carrier, from 2012. This impressive collection of essays covers the many strands of economic anthropology, from literature on different regions and economic mechanisms to different topics, such as agriculture, industry, consumption, culture, and the financial crisis of 2008.*The architecture of markets: An economic sociology of twenty-first-century capitalist societies*by Neil Fligstein, from 2001. This book introduces students to the field theoretic approach to markets, paying particular attention to institutions, employment systems, corporate governance and globalization.*The Social Structures of the Economy*by Pierre Bourdieu, from 2000. This book presents an extensive and detailed analysis of the French housing market followed by a short introduction into the field theoretic approach to studying markets.*The Impact of Social Structure on Economic Outcomes*by Mark Granovetter, from 2005. This influential article spells out key insights into how social networks shape economic behavior and market dynamics.*Economic Lives: How Culture Shapes the Economy*by Viviana Zelizer, from 2010. This book brings together the literature using a cultural approach to understand the economy and markets, discussing issues related to pricing, money, intimacy, care and commerce.*Anthropology and Economy*by Stephen Gudeman, from 2016. This book introduces students to looking at the economy through an anthropological lens, taking insights from different cultures and paying attention to different ways of organizing.*Institutions in Economics: The Old and the New Institutionalism*by Malcolm Rutherford, from 1999. A useful introduction into the different ideas and assumptions of institutional economics.*The Evolution of Institutional Economics: Agency, Structure and Darwinism in American Institutionalism*by Geoffrey Hodgson, from 2004. An influential book on the history and theoretical foundations of institutional economics.

### Institutions and different ways of organising the economy

A key insight from game theory is that the rules of the game can drastically change its outcomes. The ways economic processes are organized in the real world are thus crucial for students to learn about, if they are to understand how economic outcomes come about. Therefore we propose to spend substantial attention to the institutional frameworks that determine the rules of the games. So instead of (only) giving students assignments to calculate optimal strategies for given games, let students compare, and possibly even design, different ‘games’ and institutional arrangements.

As above, the goal here should be to tackle a real world problem and use game theory to analyse which institutional solution would be best. An example could be to investigate what a competition authority could do when companies are colluding with each other. Or if a natural resource is being overused, how can the community stop this and move towards a sustainable situation? These solutions can require rather small institutional changes that later pay off for actors and in doing so will change their strategies and the outcome. But it can also amount to more systemic change in the institutional set-up, thereby changing the logic of the ‘game’ more fundamentally. Here research oriented on institutional varieties, such as that of Elinor Ostrom, is particularly relevant, as well as auction and matching theory, focused on optimal allocation through market design.

For more detail, see *Building Block 5: Economic Organizations & Mechanisms *and* Building Block 6: Political-Economic Systems*, as well as the sections *Markets* and *Governments *in the background material *Pragmatic Pluralism*.

**Teaching Materials**

*Governing the Commons: The Evolution of Institutions for Collective Action*by Elinor Ostrom, most recent edition from 2015. A sharp and rigorous discussion of commons, how they are different from markets and hierarchies, how we should theorize them and real-world examples that help us better understand how they can be successful.*Understanding Institutional Diversity*by Elinor Ostrom, from 2005. An impressive book that brings together research on different ways economies are organized, helping students understand and identify institutional rules, structures and diversity.*Market Design: Auctions and Matching*By Guillaume Haeringer, from 2018. A useful introduction into the economics of auctions and matching, with chapters on ecommerce, finance, and healthcare.*Designing economic mechanisms*by Leonid Hurwicz and Stanley Reiter, from 2006. A theoretical entree into market design, building on game theory and neoclassical models with the aim of achieving optimal allocative efficiency.*The Handbook of Market Design*by Nir Vulkan, Alvin E. Roth, and Zvika Neeman, from 2013. A thorough collection of essays on the different aspects of market design, from stress testing for misbehavior and internet auctions to kidney exchange and school choice.

### Societal relevance and normative aspects

The moral beliefs of people do influence behavior and as stated above in particular institutional and cultural economists have paid attention to this. We thus advise to teach students about how differences in moral beliefs can impact outcomes, even when the rules of the game are the same. But the point here is something else. When using game theory to tackle real world issues, differing ethical goals and assumptions result in different solutions or suggestions for action and policy. Therefore it is important that students learn about different normative approaches and see how these can lead to other conclusions.

In ethics itself, game theory is often applied to help explain, or justify, the existence of moral norms and practices. While this is a hugely interesting literature, we advise to focus on how different ethical assumptions can lead to different conclusions, making use of game theory. If the goal of the course would be to explain why there are certain moral norms, the game theoretical explanations, alongside other theories, should be included, but this is not the aim of game theory courses. The aim of game theory courses is to teach economists how they tackle real world issues with the help of game theory and learning about the role of the ethical aspects in this should thus be the focus.

For more detail, see *Building Block 10: Economics for a Better World*.

**Teaching Materials**

*Game theory: A critical introduction*by Shaun Hargreaves-Heap and Yanis Varoufakis, from 2004, chapter 1. This useful book provides an introduction and overview of game theory, helping students better understand its core assumptions and relation to normative ideas.

### History

Finally, game theory courses could be enriched by discussing and introducing students to its fascinating history. By learning more about how the ideas developed and have been applied students will better understand their intended purpose and (potential) role. Furthermore, it can help make the analytical material come alive for students. By putting students in a historical context, such as the Cold War, or a more recent real world situation, the abstract game theoretical tools become more concrete in their implications and usage.

For more detail, see *Building Block 3: Economic History *and* Building Block 4: History of Economic Thought & Methods*.

**Teaching Materials**

*Toward a history of game theory*by E. Roy Weintraub, from 1992. This useful collection of essays focuses on the development of game theory, mainly since 1945 with the contributions from von Neumann and Morgenstern as well as applications into operations research and experimental economics.*The history of game theory, volume 1: From the beginnings to 1945*by Mary Ann. Dimand and Robert Dimand, from 1996. An insightful introduction into the older history of game theory, with attention to early voting and conflict theorists as well as probabilists and 19th century economists.*A Companion to the History of Economic Thought*by Warren J. Samuels, Jeff E. Biddle, and John B. Davis, from 2003, chapter 24 & 25. An extensive and detailed collection of contributions covering many periods and developments in the history of economic thought, with two chapters specifically devoted to the history of post-war neoclassical microeconomics, game theory, and formalist revolution in economics.

### What to take out

To create space for the above suggested additions, we advise to focus more on the key ideas and intuitions behind the taught models and devote less teaching time to their technicalities and mathematics. As teaching students to reproduce and work through mathematical models often takes up a large part of the teaching time, this would give the teachers the opportunity to devote more time to practical knowledge, the relevance, institutions, and history. Furthermore, simply teaching a smaller amount of game-theoretical models and instead teaching more of the other aspects mentioned above could enhance students’ understanding and mastery of game theory.