SYMBOLICSYSTEMS202:TheRationalityDebate(3units)WinterQuarter20032004,Stanford UniversityInstructor:ToddDavies GameTheoryThroughExamples(2/11/04) Gamesagainstnaturedecisiontheoryforasingleagent Expectedutilitytheoryforasingleagentissometimescalledthetheoryof"gamesagainstnature". Considerthisexample. Example1:Planningaparty Ouragentisplanningaparty,andisworriedaboutwhetheritwillrainornot.

Theutilitiesand probabilitiesforeachstateandactioncanberepresentedasfollows: Nature'sstates: Rain (p=1/3) Partyplanner'spossibleactions: Outside 1 Inside 2 TheexpectedutilityofanactionAgivenuncertaintyaboutastateS=Probability(S|A)*Utility(S|A)+ Probability(notS|A)Utility(notS|A)NotethatactionAcanbeviewedasacompoundgambleoroutcome. Also,notethattheprobabilityofastatecandependontheagent'schoiceofaction,although,intheabove example,itdoesnot. Forthepartyproblem:EU(Outside)=(1/3)(1)+(2/3)(3)=2.67;EU(Inside)=(1/3)(2)+(2/3)(2)=2 Therefore,chooseOutside,theactionwiththehigherexpectedutility (Noncooperative)gametheorydecisiontheoryformorethanoneagent,eachactingautonomously(no bindingagreements) Intheexamplesbelow,we'llassumetwoselfutilitymaximizingagents(orplayers),eachofwhomhas completeinformationabouttheoptionsavailabletothemselvesandtheotherplayeraswellastheirown andtheother'spayoffs(utilities)undereachoption. Example2Friendshopingtoseeeachother Considertwopeople,ChrisandKim.Theybothenjoyeachother'scompany,butneithercan communicatewiththeotherbeforedecidingwhethertostayathome(wheretheywouldnotseeeach other)orgotothebeachthisafternoon(wheretheycouldseeeachother).Eachprefersgoingtothe beachtobeingathome,andprefersbeingwiththeotherpersonratherthanbeingapart.Thisgamecanbe representedbythefollowingnormal(ormatrix)form:

Kim Home Chris Home (0,0) Beach (1,0) Eachplayerhasasetofstrategies(={Home,Beach}forbothplayersinthisexample).Specifyingone strategyifortherowplayer(Chris)andonestrategyjforthecolumnplayer(Kim)yieldsanoutcome, whichisrepresentedasapairofpayoffs(Rij,Cij),whereRijistheutilitytherowplayerreceives,andCij istheutilitythecolumnplayerreceives. Inthisexample,goingtothebeachisa(strictly)dominantstrategyforeachplayer,becauseitalways yieldsthebestoutcome,nomatterwhattheotherplayerdoes.Thus,iftheplayersarebothmaximizing theirindividualexpectedutilities,eachwillgotothebeach.SoBeachBeachisadominantstrategy equilibriumforthisgame.Becauseofthis,KimandChris,iftheyarerational,donotneedtocooperate (makeanagreement)aheadoftime.Eachcanjustpursuetheirowninterest,andthebestoutcomewill occurforboth. Example3"Friends"withasymmetricpreferences NowconsiderBettyandJohn.JohnlikesBetty,butBettydoesn'tlikeJohnthatmuch.Eachknowsthis, andneitherwantstocalltheotherbeforedecidingwhattodothisafternoon:stayattheirrespective homesorgototheneighborhoodswimmingpool.Hereisthenormalform: John Home Betty Home (2,0) Pool (3,0) Inthiscase,Betty'sbeststrategydependsonwhatJohndoes.ButifsheassumesJohnisrational,shewill reasonthathewillnotstayhome,becausegoingtothepoolisadominantstrategyforhim.Knowing this,shecandecidetostayhome(because2>1).Thisiscallediterateddominance.Inthisexample, BettygetshigherutilitythanJohnbecauseoftheirrelativepreferences,andJohngetslessutilitythanhe wouldhaveifBettywantedtobewithhim. Inthisexample,PoolHome(3,0),HomePool(2,1),andPoolPool(1,2)areallParetooptimal outcomes.AnoutcomeisParetooptimal(orefficient)ifnoagentcanbemadebetteroffthanthat outcomewithoutmakinganotheragentworseoff.Theequilibriumoutcomesinboththisexampleand thepreviousoneareParetooptimal. Example4Prisoners'dilemma ConsiderStanandLeland,twoprisonerswhohaveeachbeenofferedadealtoturnstate'switness(defect) againsttheother.Theycan'tcommunicate.Theyhadorginallyagreedtoremaininsolidarity,i.e.not testifyagainsteachother,butsincetheagreementcannotbeenforced,eachmustchoosewhethertohonor it.Ifbothremaininsolidarity,thentheywilleachonlybeconvictedofaminorchage.Ifonlyone defects,thenthestatewillthrowthebookattheotherandletthedefectorgo.Iftheybothdefect,each willgetconvictedofaseriouscharge.Thepayoffmatrix(higherpositiveutilityimpliesabetter outcome)isasfollows:

Leland

Solidarity Stan Solidarity (3,3) Defection (4,1) Inthisgame,thestrategyofdefectionisweaklydominantforeachplayer,meaningthatwhateverthe otherplayerdoes,defectingyieldsanoutcomeatleastasgoodandpossiblybetterthanremainingin solidaritywould.Notethatifthebottomrightcellpayoffswere(2,2)insteadof(1,1),thendefecting wouldbestrictlydominantforeachplayer.Eitherway,DefectionDefectionisadominantstrategy equilibrium.However,itisnotParetooptimal.Bothplayerscouldbemadebetteroffifneitherdefected againsttheother. Thisisanexampleofasocialdilemma:asituationinwhicheachagent'sautonomousmaximizationof selfutilityleadstoaninefficientoutcome.Suchasituationcanoccurforanynumberofpeople,notjust two.Anagreementbytwopeopletotradewitheachother(involvinggoods,services,and/ormoney) set'supaprisoners'dilemmatypegamewhenevertheagreementcannotbeenforced. Example5Coordination Let'sgobacktoChrisandKim.Theyaregoingtothesameconference,andeachisexpectingtheother tobethere,buttheyhaven'tseeneachotheryet.Theconfereeshavetheirchoiceoftwoactivitiesonthe firstafternoon:swimmingorhiking.Theybothhopetoseeeachotheriftheydon'ttheywillhaveno fun,andeachprefersswimmingoverhiking.Theymusteachdecidewhattodobeforeknowingwhere theotherisgoing.Hereisthenormalform: Kim Swim Chris Swim (2,2) Hike (0,0) ThebestoutcomeisobviouslySwimSwim,butgoingswimmingisnotdominantforeitherplayer.Both SwimSwimandHikeHikehavethepropertythateachplayer'sstrategyisthebest(ortiedforthebest) responsetotheotherplayer'sstrategyinthatpairing.Thisdefinesamoregeneralequilibriumnotion calledtheNashequilibrium.Thedominanceequilibriaofexamples13areallNashequilibriaaswell. Athirdequilibriumexistsinthisgameinvolvingwhatarecalledmixedstrategies.Amixedstrategyisa probabilitydistributionoverthepurestrategies(whichareSwimandHikeforeachplayerinthis example).(Notethattheplayersdonothavetohavethesamesetofstrategiesavailabletothem,even thoughthathasbeenthecaseinallourexamples.)Inthisexample,ifeachplayerindividuallythrowsa dieandgoesswimmingifthediecomesup1or2,andgoeshikingifthediecomesup3,4,5,or6,the resultingexpectedutility(2/3foreachplayer)cannotbeimproveduponforeitherplayergiventhatthe otherplayerusesthisstrategy. In1950,JohnNash(depictedsomewhatfictitiouslyinthefilmABeautifulMindthebookismore accurate!)provedthateveryfinitegame,involvinganynumberofplayers,hasatleastone(Nash) equilibrium,thoughtheremightnotbeanythatinvolveonlypurestrategiesforallplayers.Inthis example,therearethreeequilibria:themixedstrategyequilibrium(Swim,1/3;Hike,2/3) (Swim,1/3;Hike,2/3),andtwopurestrategyequilibriaSwimSwimandHikeHike.

Whenthereismorethanoneequilibrium,andplayerscannotmakebindingagreements,theymusttryto coordinatetoarriveatanequilibriumoutcome.WhenonlyoneequilibriumisalsoParetooptimal,as SwimSwimisinthiscase,thatfactshouldsuggesttorationalplayersthatitwillbetheonearoundwhich theycoordinate.Manyothercriteriaforequilibriumselectionhavebeenstudied(e.g.focalpoints, subgameperfection,stabilityseethereadingongametheory). Example6"Battleofthesexes" Finally,let'sconsiderRoyandJen.TheyaregoingtothesameconferenceasKimandChrisinexample 5.Theyeachwouldprefertobeinthesameplace(theswimorthehike),buttheirpreferencesdiffer aboutwhichitshouldbe.Roywouldrathergoswimming,andJenwouldrathergohiking.Hereisthe matrixform: Jen Swim Roy Swim (3,2) Hike (1,1) ThisgamehasthreeNashequilibria:SwimSwim,HikeHike,and(Swim,2/3;Hike,1/3) (Swim,1/3;Hike,2/3).Notethatthemixedstrategiesdifferforeachplayerinthethirdequilibrium:each goestotheirpreferredactivitywith2/3probability. AlloftheequilibriaareParetooptimalthistime,sothatdoesnothelpforselection.Onlythemixed strategyequilibriumresultsinequalexpectedutilitiesforthetwoplayers,soifbothvalueequalityor symmetry,thismightbethefocalpoint.ButofcourseitwillbedifficultforRoyandJentoseethat unlesstheyhavestudiedgametheory!