Thursday, May 21, 2009

Strategies and Games: Theory and Practice. Book Review

Strategies and Games: Theory and Practice. Book ReviewA good textbook should be comprehensive and readable; it should also be intuitive, but with enough rigor to adequately explain its points. These conditions are met by Professor Dutta's new game theory text.

The author covers all the major topics of game theory. He divides the book into five parts. The first section, the introduction, shows readers where game theory can be usefully employed, and also introduces the basic terminology of game theory. The second section discusses strategic form games. In this section the author examines the core of game theory. Readers learn about dominant and dominated strategies, iterated elimination of dominated strategies, Nash equilibrium, and mixed strategies. Along the way, the author has detailed chapters on the tragedy of the commons, Cournot duopoly, and zero-sum games. Section three examines extensive form games. Here the reader learns of backward induction, subgame perfect equilibrium, finitely and infinitely repeated games, and dynamic games. Applications of theory include OPEC, the NASDAQ market and the research and development game. In the fourth section the topic is games of asymmetric information, and here the author analyses moral hazard, games with incomplete information, and mechanism design. The final section reviews background material necessary to understand the book's contents, including utility and expected utility theory, calculus and probability.

Although the book does an excellent job of covering the basics of game theory, it stays too close to both theory and economics. None of the surprising results of experimental economics (for example, how subjects in experiments actually play the prisoner's dilemma or public goods games) on game theory are presented. Although including much of this information would have greatly lengthened the book, some discussion of this research would improve the book. Another minor quibble concerns the almost exclusive use of economics examples. This book is so well written that anyone with a basic understanding of economics and calculus can grasp it. As a result, students from other disciplines (for example, political science, anthropology, psychology, and evolutionary biology) may be interested in reading this book. Unfortunately, there are very few non-economic examples. While this is good for economists, it may alienate others who would benefit from this book.

The author manages to immediately interest the reader in his topic with an excellent introduction. He also provides three excellent background chapters on calculus, probability, and utility and expected utility theory. While none of these chapters go into great depth, they give any reader with a basic knowledge of calculus and introductory microeconomics a wonderful, quick review of these topics. In fact, Dutta's explanations are very intuitive and help the reader remember these concepts.

Concepts are explained clearly, using verbal arguments, figures, and mathematical arguments. The author combines these three forms of explanation effectively. He uses enough mathematics to make his point, but never overwhelms the reader. In addition, his interpretations of the mathematical results increase the reader's understanding. The figures and graphs are easy to understand, and also help illustrate the points made in the text.

The book is well organised. Chapters are short and to the point. When a particular example threatens to overwhelm a chapter, Professor Dutta wisely creates a chapter for that example. As a result, for many sections the pattern of the book is: theory, example, theory, example.

These example or application chapters are excellent explanations of real economic situations. The author does a wonderful job describing the situation, describing the intuition behind applying the particular theoretical model to that situation, and then working through the model and its implications. These chapters are great examples of how game theory should be used to analyse real world situations.

At the end of each chapter there is an extensive list of questions to help the reader further understand the issues covered. Although these questions are useful, if the author had provided the answers to some of the questions, the book would be better.

Professor Dutta has produced an excellent textbook for upper level undergraduate and beginning graduate students. His book is clear, concise, and provides many illustrative and enlightening examples. Any teacher planning to teach a course in game theory would be well advised to examine this book.

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