1. Basics

This chapter delves into the basics of dynamic optimization using the analogy of slicing and distributing cake at a party. It explores the concepts of stages, states, and choices, illustrating how decisions made at each stage affect subsequent opportunities and outcomes. The text discusses the importance of feasibility and optimality in decision-making, using tables to demonstrate different paths and their implications. It also covers the concepts of path dependence and hysteresis, emphasizing the interconnectedness of decisions over time. The chapter concludes with a thought experiment on daily commutes, encouraging readers to apply these concepts to real-life scenarios. Readers will gain insights into the sequential nature of decision-making and the importance of considering future implications when making choices today.