Sequential Games & Backwards

Induction
Solving a sequential game is easy. We begin with decisions that
lead only to terminal nodes of the game, choose the action that
maximizes the payoff of the player choosing at that node, and then
work backwards through the earlier nodes of the game.
Each player can predict what other players will do at subsequent
nodes, so he/she can predict the exact consequences of his/her
possible moves before the move. For earlier nodes, we substitute
the eventual outcome that will be reached for each move using the
anticipated future moves of the other players. This is called
backwards induction.
Example (Charlie Brown vs. Lucie): Suppose Lucie’s top
choice is Charlie Brown falling down, next choice is nothing
happening, and last choice is Charlie Brown kicking the ball.
Charlie Brown has the opposite ranking. Then we can solve the
sequential game played by them using backwards induction:
 sCharlie Brown falls down

Pull the ball

L
@
Accept @
Let him@kick
@
CB @sCharlie Brown kicks the ball
@
@
Reject @
@
@sNothing happens
 s (2,1,2)
Example: A

3
L @
@
B @s (3,3,1)
2
@
U R@@s (2,0,2)

1
@
@
@ s (1,3,2) s (1,2,1)
D@ l W
@@ 2 1
@ X @
r@@ Z@
@s (0,3,2)
w s (2,3,0)
3
@
@
Y@
1
@
z@@s
(1,2,1)
 Example (3-Level Centipede):

(3,1) (2,3) (6,2) (4,6) (12,4) (8,12)

s s s s s s
S S S S S S

1 2 1 2 1 2 s (24,8)
C C C C C C
Example: Three members of a committee should choose among
four candidates A,B,C,D. The procedure is such that
• member 1 vetoes a candidate,
• observing this member 2 vetoes another, and
• observing members 1 and 2, member 3 vetoes a third candidate.
The surviving candidate is elected. The preferences of the members
(from best to worst) are as follows:
Member 1: C B D A
Member 2: B C A D
Member 3: A B C D
Let’s find the elected candidate using backwards induction.
 (C(((rD
 3 hhh hrC
B
 D
B(((rD

2 PP C (
3 hhh

PP D hrB

D PPP3( B(((rC
hhh

C hrB

(C(((rD
A
 h
 3 hh hrC
A
  D

 (
hA(((rD

 2 PPPC 3 hh hrA
 PP D

B  D PP3( A(((rC
h h hr

 C h A
1


H
J HH B(((rD
J HH  (
 3 hhh
C A  hrB
J HH  D
H  (A(((rD
J 2 PP B 3 hhh
J PP D hrA
DJ D PPP3( A(((rB
hhh
J B hrA
J
J (B(((rC
 h
 3 hh hrB
J A
  C
J  A(((rC
J2 PP B (
h
3 hh
PP C hrA
C PPP3h (A(((rB
hh
B hrA
Example (Voting for a Pay Raise): Three legislators are
voting on whether to give themselves a pay raise. All three want
the pay raise; however each face a small cost in voter resentment
c > 0. The benefit for the raise is b > c. They vote in the order
1-2-3. What is the outcome obtained by backwards induction?

( (r(b-c,b-c,b-c)
y((
Y  3 hnhh
hr(b-c,b-c,b)


 2 PPP
 PP (r(b-c,b,b-c)
Y
  N PP ( y((
 3 hhhhr(-c,0,0)
 n

1H
HH (r(b,b-c,b-c)
y((
(
H
N HH Y  3 hnhh
hr(0,-c,0)

HH 
2 PP
PP
N PPP ( (r(0,0,-c)
y((
3 hhh
n hr(0,0,0)
 s (2,1,2)
A
Example (Tricky!):
3
L @
@
B @s (3,3,1)
2
@
U @
R @s (2,0,2)

1
@
@
@ s (3,2,2) s (1,2,1)
D@ l W
@@ 2 1
@ X @
r@@ Z@
@s (0,3,2)
w s (2,3,0)
3
@
Y@@
1
@
z@@s
(1,2,1)