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!