Game Theory

 Game theory was developed by John Von

Neumann and Oscar Morgenstern in 1944 -
 Economists!
 One of the fundamental principles of game
theory, the idea of equilibrium strategies was
developed by John F. Nash, Jr. (
A Beautiful Mind), a Bluefield, WV native.
 Game theory is a way of looking at a whole
range of human behaviors as a game.

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Components of a Game
 Games have the following
characteristics:
 Players
 Rules
 Payoffs
 Based on Information
 Outcomes
 Strategies
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Types of Games
 We classify games into several types.
 By the number of players:
 By the Rules:
 By the Payoff Structure:
 By the Amount of Information Available to
the players

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Games as Defined by the
Number of Players:
 1-person (or game against nature,
game of chance)
 2-person
 n-person( 3-person & up)

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Games as Defined by the
Rules:
 These determine the number of
options/alternatives in the play of the
game.
 The payoff matrix has a structure
(independent of value) that is a function
of the rules of the game.
 Thus many games have a 2x2 structure
due to 2 alternatives for each player.
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Games as Defined by the
Payoff Structure:
 Zero-sum
 Non-zero sum
 (and occasionally Constant sum)
 Examples:
 Zero-sum
 Classic games: Chess, checkers, tennis, poker.
 Political Games: Elections, War
 Non-zero sum
 Classic games: Football (?), D&D, Video games
 Political Games: Policy Process

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Games defined by information
 In games of perfect information, each player
moves sequentially, and knows all previous
moves by the opponent.
 Chess & checkers are perfect information games
 Poker is not
 In a game of complete information, the rules are
known from the beginning, along with all possible
payoffs, but not necessarily chance moves

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Strategies
 We also classify the strategies that we
employ:
 It is natural to suppose that one player
will attempt to anticipate what the other
player will do. Hence
 Minimax - to minimize the maximum loss -
a defensive strategy
 Maximin - to maximize the minimum gain -
an offensive strategy.
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Iterated Play
 Games can also have sequential play
which lends to more complex strategies.
 (Tit-for-tat - always respond in kind.
 Tat-for-tit - always respond conflictually to
cooperation and cooperatively towards
conflict.

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 Game or Nash Equilibria
 Games also often have solutions or
equilibrium points.
 These are outcomes which, owing to the
selection of particular reasonable
strategies will result in a determined
outcome.
 An equilibrium is that point where it is not
to either players advantage to unilaterally
change
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his or her mind. 10
Saddle points
 The Nash equilibrium is also called a
saddle point because of the two curves
used to construct it:
 an upward arching Maximin gain curve
 and a downward arc for minimum loss.
 Draw in 3-d, this has the general shape of a
western saddle (or the shape of the universe;
and if you prefer). .

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Some Simple Examples
 Battle of the Bismark Sea
 Prisoner’s Dilemma
 Chicken

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The Battle of the Bismarck Sea
 Simple 2x2 Game
 US WWII Battle
Japanese Options
Sail Sail
North South
Recon 2 Days 2 Days
US North
Options Recon 1 Day 3 Days
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South 13
The Battle of the Bismarck Sea
Japanese Options
Sail Sail Minima
North South of Rows
Recon 2 Days 2 Days 2
US North
Options Recon 1 Day 3 Days 1
South
Maxima of Columns 2 3
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The Battle of the Bismarck Sea
- examined
 This is an excellent example of a two-person
zero-sum game with a Nash equilibrium point.
 Each side has reason to employ a particular
strategy
 Maximin for US
 Minimax for Japanese).
 If both employ these strategies, then the
outcome will be Sail North/Watch North.

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 Decision Tree
Decision Tree Version of Battle of Bismark Sea

Search
North
2

Sail North

Search
South
1

Japanese

Search
North
2

Sail South

Search
South
3
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The Prisoners Dilemma
 The Prisoner’s dilemma is also 2-person
game but not a zero-sum game.
 It also has an equilibrium point, and
that is what makes it interesting.
 The Prisoner's dilemma is best
interpreted via a “story.”

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A Simple Prisoner’s Dilemma
Prisoner A
~ Confess Confess

~ Confess -1 0
-1 -10
Prisoner B
Confess -10 -5
0 -5

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 Alternate Prisoner’s Dilemma
Language
Uses Cooperate instead of Confess to denote player cooperation with
each other instead of with prosecutor.

Prisoner A
Cooperate Defect

Cooperate -1 0
-1 -10
Prisoner B
Defect -10 -5
0 -5

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 What Characterizes a
Prisoner’s Dilemma
Uses Cooperate instead of Confess to denote player cooperation with
each other instead of with prosecutor.

Prisoner A
Cooperate Defect

Cooperate Reward Tempt

Reward Sucker
Prisoner B
Defect Sucker Punish
Tempt Punish

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What makes a Game a
Prisoner’s Dilemma?
 We can characterize the set of choices in a
PD as:
 Temptation (desire to double-cross other player)
 Reward (cooperate with other player)
 Punishment (play it safe)
 Sucker (the player who is double-crossed)
 A game is a Prisoner’s Dilemma whenever:
 T>R>P>S
 Or Temptation > Reward > Punishment > Sucker
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What is the Outcome of a PD?
 The saddle point is where both Confess
 This is the result of using a Minimax
strategy.
 Two aspects of the game can make a
difference.
 The game assumes no communication
 The strategies can be altered if there is
sufficient trust between the players.

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Solutions to PD?
 The Reward option is the joint optimal
payoff.
 Can Prisoner’s reach this?
 Minimax strategies make this impossible
 Are there other strategies?

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Iterated Play
 The PD is a single decision game in
which the Nash equilibrium results from
a dominant strategy.
 In iterated play (a series of PDs),
conditional strategies can be selected

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The Theory of Metagames
 Metagames step back from the game and look
at the other players strategy
 Strategic choice is based upon opponents
choice.
 For instance, we could adopt the following
strategies:
 Tit-for-tat
 Tat-for-tit
 Choose Confess regardless
 Choose ~Confess regardless

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 A Prisoner’s Dilemma
Metagame
Prisoner A
~ Confess Confess Tit-for-tat Tat-for-tit
Regardless Regardless

~ Confess -1 0 -1 0
-1 -10 -1 -10
Pris
B Confess -10 -5 -5 -10
0 -5 -5 0

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The Full PD Metagame
 See page 36 in Brahms
 Using the Metagame tit-for-tat strategy,
we get three possible equilibria
 One the original both confess
 The other two, both ~confess (a
cooperative solution)

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The Morality of tit-for-tat
 Note that the conditional strategy of
cooperate regardless is a direct manifestation
of the Golden rule, perhaps the simplest and
most ubiquitous moral maxim we have.
 Tit-for-tat invokes a rough system of justice
(or equality in any event)
 Because tit-for-tat always results in equal
payoff to both players, it is a very equitable
strategy.
 It also teaches its morality, by encouraging
mutual benefit through reciprocity.
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Chicken
 The game that we call chicken is widely
played in everyday life
 bicycles
 Cars
 Interpersonal relations
 And more…

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The Game of Chicken
Driver A
~ Swerve Swerve

~ Swerve 1 2
1 4
Driver B
Swerve 4 3
2 3

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Chicken is an Unstable game
 There is no saddle point in the game.
 No matter what the players choose, at
least one player can unilaterally change
for some advantage.
 Chicken is therefore unstable.
 We cannot predict the outcome

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Chicken is Nuclear Deterrence

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National Missile Defense
 Let’s pick a current problem
 National Missile Defense
 Structure this as a game

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The Game of National Missile
Defense
US
Build ~ Build

Attack $60B $1Tr

$5B+G $5B+G
Rogue State
~ Attack $60B 0
0 0

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Calculating Expected Utility of
NMD
 E(Build)=pA(B-C)+p~A(B-C)
 E(~Build)=pA(B-C)+p~A(B-C)

 E(Build)=pA(0-60)+p~A(0-60)
 E(~Build)=pA(0-1000)+p~A(0-0)

 Build NMD if E(Build)>E(~Build)

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Spreadsheet
 Open Excel table

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Utility Curves

p1
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Adding Complexity
 More players
 Information differences
 If players do not know the payoffs then
they have very incomplete information
 Nested Games
 The

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Tragedy of the Commons
 First observed during the British
Enclosure movement
 Describes the problem of the
unregulated use of a public good
 Take a commons – e.g. a common
pasture for grazing of cattle in a village

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An example
 Take a village with 10 families
 Each family has 10 cows which just
exactly provide the food they need.
 The village commons has a carrying
capacity of 100 cows

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 Cow Carrying Capacity
 Each cow produces 500 lbs of meat & dairy
per year up to or at carrying capacity of the
pasture.
 10 families X 10 Cows X 500 lbs =
50,000 lbs of food at carrying capacity

 …and then Farmer Symthe’s wife has triplets…

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One more cow
 So Farmer Smythe decides he really needs
one more cow.
 And there is no one to tell him no because
the commons is an unregulated public good
 Like
 Air
 Water
 Security ?

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Reduced Capacity
 With the overgrazing, each cow will now
produce only 490 lbs of food.
 10 families X 10 Cows X 490 lbs =
49,000 lbs of food at carrying capacity
 Each family gets 4900 lbs of meat & dairy,
instead of 5000.
 Except Farmer Smythe, who gets 5390 lbs
 Even with the reduced carrying capacity, it is
still to his advantage to add the extra cow

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Look Familiar?
 Look at the situation
 N players
 Equilibrium solution is to ~ cooperate
 Joint optimal outcome is to cooperate,
 This is an n-person Prisoner’s dilemma

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Thinking Strategically
10 Tales of Strategy
 Dixit and Nalebuff offer 10 simple
concepts that are strategic in nature.
 They are worth reviewing, as they all
demonstrate some particular strategic
choice.

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 The Hot Hand
 Are ‘hot hands’ just random sequences in a long
series of trials?
 Probabilistic analysis suggests that what sports
observers claim as periods of exceptional
performance are not statistically excessive
 But hot hands may be masked by team responses.
 Take tennis:
 If your backhand is weak, your opponent will play to it.
 Improve your backhand, and you get to use your better
forehand more

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To Lead or not to Lead
 Front-runner strategy
 The leading sailboat copies the strategy
of the trailing boat.
 Doesn’t work in 3 boat races
 Applicable to election?
 When to go negative?

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Go Directly to Jail
 Just the Prisoner’s Dilemma

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Here I stand
 Taking an irrevocable stand may change
your opponent’s strategies.
 A public statement makes a commitment
(and thereby changes payoffs) in ways
that may dictate an outcome.
 Opponent has to “take it or leave it.
 May be costly next time!

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Belling the Cat
 Is the individual willing to assume the risks of
the group
 This is a “Hostages Dilemma”
 Note the reference to plane full of passengers
powerless before a hijacker with a gun.
 Is this likely to be the case after 9/11?
 What does this say about this strategic decision?

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The Thin End of the Wedge
 Special interests get attention due to a
one-at-time strategy
 We approve special provisions for a
single request, when if we looked at the
aggregate impact of many such
requests, we might not…
 Line item veto is strategy for dealing
with it.

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Look before you leap
 Look at long term
consequences/commitments prior to
decision
 E.g heroin

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Mix your plays
 Rely on your best strategy – strongest
asset
 But not exclusively
 If you run the football every play, the
defensive backfield will pull in and you
will be less effective.
 The pass sets up the run.

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Never give a sucker an even bet
 When someone offers to bet you, they
often know the odds – don’t bet.
 Such as appliance warranties

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Game theory can be
dangerous to your health
 Check your bargaining position before
you negotiate.
 Do you negotiate first or afterwards?
 Does your physical setting influence
strategy?

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Other Games
 Battle of the Sexes

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Battle of the Sexes
M
Football Ballet

Football 2 0
1 0
F
Ballet 0 1
0 2

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Battle of the sexes

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