4:Beliefs,MixedStrategiesand

ExpectedPayoffs
Inastrategicinteractionsettingplayersmusttryto
anticipate theactionsthatothersinthegamewill
choose.
Wemodelthiswiththeassumptionthatplayers
constructbeliefs aboutthestrategiesofothers.
Aformalmathematicalrepresentationofdecision
makingrequiresawelldefinednotionofbeliefs.
Beliefsforplayer aresummarizedbyaprobability
distributionover
-|
.
Thatis,whenconstructinghisbeliefs,player
assignsaprobabilitytoeachoftheprofiles
- -
Thetextbookrepresentsbeliefsforplayer using
theGreeklettertheta,as
-|
.

-|
isanelementof
-|
,thespaceofall
probabilitydistributionsdefinedover
-
.
If
-
isfinite(morerigorously,ifitiscountable),
thenforeachprofile
- -
,thecorresponding
belief
-| -|
representsplayer
i
assessment
oftheprobabilitythatallotherplayersinthe
gamewillselecttheprofile
-|
.
If
-
isfinite,thensince
-
isawelldefined
probabilitydistribution,itmustsatisfy:
- -
foreach
- -
,
and
- -
s
-i
S
-i
Mixedstrategy:Amixedstrategyforplayeri is
givenbyaprobabilitydistributionoverthe
spaceofhisownactions,

.
Moreformally,amixedstrategyistheactof
choosingactionsover

accordingtoa
probabilitydistribution.
ThebookusestheGreeklettersigmatodenote
mixedstrategies,as
|
.
Sincemixedstrategiesarewelldefined
probabilitydistributions,theybelongto
|
,
thespaceofprobabilitydistributionsover

.
Strategieswhereaplayerdoesnotrandomize
andinsteadchoosesagivenactionwith
probabilityonearecalledpurestrategies (they
arejustaspecialcaseofmixedstrategies,witha
degenerateprobabilitydistribution).
ExpectedPayoff:Supposeplayer isuncertain
abouttheactionstheotherplayerswillchoose
buthasformedbeliefs
-
.Theexpectedpayoff
toplayer ofchoosingaparticularaction

is
computedastheexpectedvalueof
|
if
chooses
|
andtherestoftheplayersplayed
accordingtothedistribution
-|
.
Thisexpectedpayoffisthereforegivenby:
- - -
s
-i
S
-i
-
Example: Considerthefollowingmatrixform
game:
Nextconsiderthefollowingbeliefforplayer1,
labeledas
2
:
2
,
2
,
2
Accordingtothesebeliefs,player1thinksthat
player2willchooseLwithprobability,
MwithprobabilityandRwith
probability.
Giventhesebeliefs,wecancomputethe
expectedpayoffforplayer1ofchoosingeach
oneofhisactions:U,CandD.
Wehave:
1 2
1 2 1 2
1 2
Similarly,
1 2
1
2
1
4
1
4
7
4
1 2
1
2
1
4
1
4
20
4
Accordingtothesebeliefs,choosingeitherUorD
yieldsahigherexpectedpayoffthanchoosingC.
Player1wouldbeindifferentbetweenUandD(in
anexpectedpayoffsense).
Computingtheexpectedpayoffforamixed
strategy:Letusgeneralizetheconstructionof
expectedpayoffs.Supposeplayer hasbeliefs
-|
andwantstocomputetheexpected
payoffofamixedstrategy
|
. Thisisgivenby:
| | -| | | -| | |
x
|
eS
|
Example(cont): Considerthesamesetofbeliefs
2
asinthepreviousexample.Wehadfiguredout
that:
1 2
=5,
1 2
,
1 2
Considernowamixedstrategy
1
forplayer1
givenby:
1
1
2
,
1
1
8
,
1
3
8
Theexpectedpayoffforthismixedstrategyis
withthesebeliefsis:
1 1
,
2
)=
1 2 1
+
1 2 1
1 2 1
5 1.75 5
Similarly,wewilllet
| | -|
Denotetheexpectedpayoffofplayer of
choosingthemixedstrategy

ifallotherplayersare
usingthemixedstrategy
-
.
Wecompute
| | -|
analogouslyto
| | -|
,
simplyreplacing
-|
with
-|
.
Also,wewillabbreviatemixedstrategiessimplyby
listingthenumericalprobabilitiesusedineachoneof
thestrategies.
Forexample,considerthefollowinggame:
Thenthemixedstrategy
1
1
8
1
4
1
4
3
8
refersto
themixingdistribution:
1
1
8
1
1
4
1
1
4
1
3
8
Computethefollowingexpectedpayoffsforthe
previousgame:
1 1
for
1
1
3
1
3
1
10
7
30
.
2 1
for
1
1
8
1
4
1
4
3
8
.
1 1 2
for
1
1
16
1
4
1
2
3
16
and
2
1
3
2
3
2 1 2
for
1
1
16
1
4
1
2
3
16
and
2
1
3
2
3
1 1
for
1
1
3
1
3
1
1
7
3
. Thisisplayer1s
expectedpayoffifplayer2choosesstrategy
withprobabilityone,andplayer1usesamixed
strategywhere:
1 1 1
1
Usingthedefinitionofexpectedpayoff,wehave:
1 1
1 1 1 1
1 1 1 1
2 1
for
1
1
8
1
4
1
4
3
8
. Thisisplayer2s
expectedpayoffifplayer2choosesstrategy
withprobabilityone,andplayer1usesamixed
strategywhere:
1 1 1
1
Usingthedefinitionofexpectedpayoff,wehave:
2 1
2 1 2 1
2 1 2 1
1 1 2
for
1
1
1
1
4
1
2
3
1
and
2
1
3
2
3
.
Thisisplayer1sexpectedpayoffifplayer2
choosesthemixedstrategy
2
,andplayer1uses
themixedstrategy
1
1 1 1
1
and
2 2
Weknowhowtocomputethisexpectedpayoff.Itisgivenby:
1 1 2
1 2 1 1 2 1
1 2 1 1 2 1
1 2 1 2 1 2
1 2
Therefore,wefirstneedtocompute:

1 2

1 2

1 2

1 2
Wehave:
1 2
1 2 1 2
1 2
1 2 1 2
1 2 1 2 1 2
1 2 1 2 1 2
Therefore,
1 1 2
1 2 1 2
1 2 1 2
2 1 2
for
1
1
1
1
4
1
2
3
1
and
2
1
3
2
3
.
Thisisplayer2sexpectedpayoffforthesame
mixedstrategiesasinthepreviouspart.Itisgiven
by:
2 1 2 2 1 2 2 1 2
2 1 2 1
Sonowwehavetocompute:

2 1

2 1
Wehave:
2 1
2 1 2 1
2 1 2 1
2 1
2 1 2 1
2 1 2 1
Finally,fromhereweobtain:
2 1 2 2 1 2 1
Example:Cournotduopolymodel. Letusgo
backtotheCournot duopolyexampledescribed
inthepreviouschapter,wheremarketpriceis
givenby:
1 2
Andtotalcostsforeachfirmare:

for
Whenweintroducedthisexample,weshowed
thatpayoff(profit)functionsaregivenby:
1 1 2 1 2

1
2 1 2 1 2

2
Nowconsiderthefollowingbeliefsforplayer1,
whereheconjecturesthat:Player2willproduce
2
withprobability1/4,
2
with
probability1/2,
2
withprobability1/8,and
2
withprobability1/8.
Giventhesebeliefs,computeplayer1sexpected
payoffofproducing
1
units.
Notethatplayer1sbeliefsaboutplayer2aregiven
bytheprobabilitydistribution:
2 2 2 2
and
2 2
forall
2
Giventhesebeliefs,player1sexpectedpayoffof
producing
1
unitsisgivenby:
1 1 2 1 1 2 1 1 2
1 1 2
+
1 1 2
1

1 2
1

1 2
1

1 2
1

1 2
1

1
1

1
1

1
1

1
Groupingtermswehave:
1 1 2 1
1
1 1 1 1
1 1
Thatis,theexpectedpayofffunctionforplayer1of
producing
1
unitsgiventhebeliefsdescribedaboveis:
1 1 2 1

1
Uncertaintyandtheordinalnatureofpayoffs: Whenwe
focusedonpurestrategiesonly(previoustwochapters),
wearguedthatpayoffsonlyneededtoreflecttheordinal
preferencesofplayers overoutcomes.
Inthegeneralcasewheretherecanbemixedstrategies
anduncertaintyaboutotherschoices,payoffsshould
reflecttheordinalpreferencesofplayers over
distributionsofoutcomes.
Assigningnumericalpayoffsisstraightforwardingames
wherethesepayoffshaveamonetaryinterpretation.
Otherwiseweshouldalwayskeepinmindthatthe
numericalpayoffsinagamerepresentmorethanjust
ordinalpreferencesoveroutcomes.