Game Theory | Term 4

Open Book (any book), Open Notes (any notes)

(Duration: 60 mins)

1. Three pirates (A, B, and C) arrive from a lucrative voyage with 100 pieces of gold. They
will split up the money according to an ancient code dependent on their leadership rules. The
pirates are organized with a strict leadership structure–pirate A is stronger than pirate B who
is stronger than pirate C.

The voting process is a series of proposals with a lethal twist. Here are the rules:

a. The strongest pirate offers a split of the gold. An example would be: “0 to me, 10 to
B, and 90 to C.”
b. All of the pirates, including the proposer, vote on whether to accept the split. The
proposer holds the casting vote in the case of a tie.
c. If the pirates agree to the split, it happens.
d. Otherwise, the pirate who proposed the plan gets thrown overboard from the ship and
perishes.
e. The next strongest pirate takes over and then offers a split of the money. The process
is repeated until a proposal is accepted.

Pirates care first and foremost about living, then about getting gold. Also, Pirates are of very
high intelligence. What do you think is going to happen? 15

Solution –

Pirate A is going to offer 1 gold to C, 0 to B and 99 to himself.

Reason being – Say B & C are not satisfied with the A’s offer, so A is thrown off. Now B is
the leader. B can give himself 100 gold without any risk because in case of a tie, B being the
leader has the deciding vote, ergo C will be left with nothing.
Since pirates are smart, it is in C’s interest to keep A alive and take up first offer presented.

2. The movie starts out with a bang. An aerial attack begins when a window shatters on
a skyscraper, allowing two robbers to glide across a zip-line on to a bank’s roof. On the
street-level, a car screeches to a stop to pick up the last member of the ground attack. The
robbers in the car explain the job and how the loot will be divided:

Driver: Three of a kind. Let’s do this.

Passenger side: That’s it–three guys?

Driver: Two guys on the roof. Every guy gets a share. Five shares is plenty.
 Passenger side: Six shares. Don’t forget the guy who planned the job.

Driver: He thinks he can sit it out and still take a slice. I know why they call him the
joker.

Can you find anything in the scene described above that has anything to do with Game
Theory? Can you explain? 5

Solution –

Scene has been taken from Batman: The Dark Knight. The problem with the goons here is
that they believed in the logical continuity of the plan proposed by the Joker, but not the
intrinsic motivation guiding the plan. Game Theory kicks in because, in a situation like this,
its not always about the pay-offs but also about the self-interest of individuals to cooperate
with each other and work things out.

3. One day you went to a library to study before Game Theory end term exam, and an
attractive person, whom you don’t know, strikes up a conversation with you. The stranger
says: ‘Let’s show pennies to each other, either heads or tails. If we both show heads, I pay
you $6. If we both show tails, I pay you $2. If they don’t match, you pay me $4.’ At this
point, she is shushed.
You think: ‘With both heads 1/4 of the time, I get $6. And with both tails 1/4 of the time, I
get $2. So 1/2 of the time, I get $8. And with no matches 1/2 of the time, the other person
gets $8. So it’s a fair game.’

As the game is quiet, you can play in the library.

Do you think you should play the game if an “attractive” stranger comes and asks you to? Try
to think of your chances of making money from a game theoretic perspective and answer.
10

Solution –

Player/Strager H T
H 3 -2 X
T -2 1 1-X
Y 1-Y

From the matrix, the player should choose a value of X, that maximizes the minimum payoff-
Player = max[min{3X + -2(1-X), -2X + 1(1-X)}]
= max[min{5X – 2, -3X + 1}]
The Stranger should choose a value of Y, that minimizes the maximum payoff –
Stranger = min[max{3Y + -2(1-Y), -2Y + 1(1-Y)}]
= min[max{5Y – 2, -3Y + 1}]

On equating- 5Y – 2 = -3Y + 1 we get, Y = 3/8

The Stranger’s optimal winning strategy is to play 3 H and 5 T.
Then, if our player chooses both H, then they’ll win –
3/8(3) + 5/8(-2) = -1/8
Or in case of tails –
3/8(-2) + 5/8(1) = -1/8
So, the player is losing 1/8 dollar per game.

For actually winning, the Player has to ensure that payoffs for the Stranger is 0, which is
possible if Y = 1/3 and they choose both T –
1/3(-2) + 2/3(1) = 0 winnings for the Stranger