David Kreps

Definition

David Kreps is a prominent economist known for his contributions to game theory, particularly in the areas of forward and backward induction. His work has significantly influenced how economic agents make decisions in strategic settings, shaping the understanding of rational behavior in dynamic environments.

5 Must Know Facts For Your Next Test

1. David Kreps is best known for his influential book 'A Course in Microeconomic Theory,' which covers essential concepts in game theory and decision-making.
2. Kreps introduced the concept of extensive form games, allowing for a structured way to represent strategic interactions over time.
3. His work on forward induction highlights how players can use their knowledge of others' potential future actions to inform their current decision-making.
4. Kreps has contributed significantly to the understanding of rational expectations and how agents form beliefs about future events.
5. He has also examined the implications of bounded rationality in strategic settings, recognizing that players may not always act in strictly rational ways.

Review Questions

• How does David Kreps's work on backward induction influence decision-making in dynamic games?
  • David Kreps's work on backward induction provides a crucial framework for analyzing how players can make optimal decisions by considering the future consequences of their current actions. By starting from the end of a game and reasoning backward, players can identify strategies that lead to desired outcomes. This approach emphasizes the importance of anticipating opponents' moves and encourages rational behavior across multiple stages of interaction.
• Discuss the significance of forward induction as proposed by David Kreps and its application in understanding strategic behavior.
  • Forward induction, as proposed by David Kreps, allows players to make decisions based on expected future actions of others, enhancing strategic thinking in dynamic scenarios. This concept highlights how knowledge of potential choices can influence present actions, leading to more informed and potentially advantageous strategies. The application of forward induction helps explain behaviors in various economic and game-theoretic contexts, demonstrating how players anticipate reactions and adjust their plans accordingly.
• Evaluate the impact of David Kreps's theories on modern economic thought regarding strategic interactions among agents.
  • David Kreps's theories have had a profound impact on modern economic thought, particularly regarding how agents interact strategically over time. His emphasis on concepts like backward induction and forward induction has reshaped the understanding of rational behavior in economics, providing tools for analyzing complex decision-making processes. By addressing bounded rationality and incorporating realistic assumptions about human behavior, Kreps's work has paved the way for more nuanced models that better reflect actual decision-making practices in various fields such as finance, negotiation, and competitive markets.

Related terms

Backward Induction: A method of reasoning used in game theory where players analyze a game by starting from the last possible move and working backward to determine optimal strategies.

Dynamic Programming: An optimization method used for solving complex problems by breaking them down into simpler subproblems, often applied in economic modeling and decision-making.

Subgame Perfect Equilibrium: A refinement of Nash equilibrium applicable in dynamic games, where players' strategies constitute a Nash equilibrium in every subgame of the original game.