Cooperation and Competition

ECO2007S
Lecturer: Adeola Oyenubi
OYNADE001@myuct.ac.za
So what is game theory?
The study of strategic decision
making
The study of mathematical
models on conflict and
cooperation between intelligent
rational decision makers
Interactive decision theory
The science of rational
behaviour in interactive
situations
General principles for strategic
interactions
Rational? Interactive?
Rationality:
Agents have
objectives/preferences
that they are aware of and
can rank and they act to
bring about their
objectives (in a calculated
way)
Interactivity:
Whats optimal depends
on what others do
(actions have impact)
Types of optimisation
Parametric:
- parameters are independent
- may be known or unknown
- your actions have no impact
Non-parametric:
- parameters interact with your
decision
- GT is non-parametric
- your actions have impact
Oskar
Morgenstern
John von
Neumann
A brief history
http://plus.maths.org/content/if-we-all-go-blonde
John Forbes Nash, Jr.
1994 Nobel Memorial Prize in Economic Sciences with game theorists
Reinhard Selten and John Harsanyi.
"No one for the blonde" is not the only way
all guys win. Everyone also wins in any
configuration of strategies "one (goes) for
the blonde" (the others for a brunette).
Furthermore, "one for the blonde" is better
for the group than the Nash/Crowe
proposal. "Better" means that no change of
strategies can make someone better off
without simultaneously making someone
else worse off.
Now to start chapter 1. :
Games that we experience
have some or all of the
following three elements:
- Chance
- Skill
- Strategy
Interested in games of strategy, neither pure
chance or pure skill
What is a game? :
Some Examples
Mixed Strategy
Some Examples
Collective action games
10% 30%
60% 80%
Some Examples
Prisoners Dilemma
Some Examples
Prisoners Dilemma
Some Examples
Coordination Failure/Focal Points
Some Examples
Commitment Devices
Russian NKVD - 1941-45
Russian special troops
advanced behind main
infantry line.
Their job? To shoot any
soldier in front lines who
didnt keep going forward.
Soldiers preferred risk of
being shot by enemy to
certainty of being shot by
NKVD.
Some Examples
Brinkmanship
A game of mutually
increasing risk
Some Examples
Screening and Signalling
The dating game
Ability to manipulate
information
How do we know what
information is credible when
it is not easily observable
Screening: Strategies that
induce players to credibly
reveal their information
Signalling: Self- chosen
strategies that convey good
information
Some Examples
Screening
Strategies that induce players to credibly reveal their information
Some Examples
Signalling
Self- chosen strategies that convey good information
Chapter 2 Strategic Games
Interactions between mutually aware
players
Players make decisions
Decisions are parametric situations
where a player can choose among a
set of actions without concern for
responses (can happen within a game)
The parameters in a decision are
fixed and unchanging (dont have to
be known)
A decision with uncertainty doesnt
make it a game (e.g. lottery provided
all that the player cares about is
winning or loosing)
A strategic game means that there is
a cross-effect resulting from actions
made by players
Game Theory: The science of rational behaviour in interactive
situations
Decisions: where a player can choose among a set of actions
without concern for responses. Other players are insignificant.
Parametric
A strategic game: there exists a cross-effect resulting from the
actions made by mutually aware players. Each player is
significant in the interaction. Non-parametric
Four types of categorisation:
Sequential vs. Simultaneous
Zero sum (constant sum) vs. Non-zero sum
Once off vs. Repeated
Complete vs. Incomplete
Sequential Games vs Simultaneous Games
Your current action is
governed by your
expectation of its future
consequences
Your current action is
governed by your thoughts
about your opponents
thoughts about your
thoughts about your
opponents thoughts
You dont know what has
happened up to that point
Zero Sum Games vs Non-Zero Sum Games
The sum of the payoffs
remains constant during the
course of the game.
Two sides in conflict
One winner and one loser
Constant sum zero sum
Tug of war
The sum of payoffs is not
constant during the course of
game play.
Players may co-operate or
compete
Multiple winners or losers
Pyrrhus the king
Another victory and we are
lost
Economics : Joint ventures
combine participants
different skills to produce a
larger pie.
Conflict vs Common Interest
Demonstration
Trade
Nuclear war
Repeated Games vs Once-off Games
Do players worry about their reputation?
Do they worry about discounting future payoffs or impatience?
If yes,
the game is repeated
i.e. game has ongoing
relationships, which
means you develop
reputation, (fairness,
honesty, etc.)
Tit for tat
If no,
the game is one-shot
i.e. dont know much
about players,
capabilities and
priorities
When do the repetitions end?
(Finite vs. Infinite)
Complete Information vs. Incomplete Information
Asymmetric/Incomplete means
some players know things others
dont, uncertain both of the
capabilities of their opponents and
of their desires and beliefs/payoffs
Incomplete players dont know
each others payoffs exactly make
use of probability distributions (in
attempt measure the uncertainty)
Perfect information (more
applicable to sequential move
games) each player, when making
any decision, is perfectly informed of
all the events that have previously
occurred
Complete- players know
their own and their
opponents payoffs with
certainty/ their
rankings/preferences
Everything is common
knowledge
Random Side Note:
Cooperative Games vs. Non-cooperative Games
We do non-cooperative game theory
even though people may end up
cooperating
Cooperative v. Non-cooperative GT is a
technical distinction about how we think
of players and their actions.
Do not worry about it, just remember that
we are studying non-cooperative game
theory
A common but futile strategy for
achieving joy is trying to eliminate
things that hurt: get rid of pain by
numbing the nerve ends, get rid of
insecurity by eliminating risks, get rid
of disappointments by depersonalising
your relationships. And then try to
lighten the boredom of such a life by
buying joy in the form of vacations and
entertainment."
- Eugene Peterson
Choices available to players
In a simultaneous games, that
is just the action taken on one
occasion
In a sequential game, then a
strategy is a complete map or
plan of the actions at EVERY
possible stage.
Strategies can tell a player to
flip a coin to randomize and
play a mixed strategy
Specify game structure
Strategy is a big part
What does the term
strategy mean in our
context?
Utilities a ranking over outcomes
Agents have preferences => utility
functions
Previously, economists thought of utility as
a subjective psychological benefit
We think of it as something at the margin
We call it a function because it maps
preferences to real numbers
We assign each agent a complete
numerical scale with which to compare
outcomes called payoffs
Higher payoffs numbers => better
outcomes
Sometimes there are natural numerical
payoffs, e.g. profit, income, years in jail
etc.
Utilities & Payoffs
Consider an agent, X
X has preferences over bundles of goods
X prefers purple to pink and pink to black
(and therefore purple to black) (transitivity)
We map these preferences to numbers
purple-> 3
pink -> 2
black -> 1
We thus construct an ordinal utility function over outcomes
Utility is not numerically measurable, but can be ranked
Utilities & Payoffs Continued
Ordinal utilities are rankings
X doesnt prefer purple 3 times as much as
black
The previous function could also look as
follows:
Purple -> 1002 7 326
Pink -> 12.6
Black -> 22/7
The ranking is maintained
Later we deal with cardinal utility
Important to note, a payoff takes into
account everything that matters to the agent
with regard to a specific outcome
Utility & Payoffs & Money
Note that, due to the decreasing marginal
utility of money, utility functions are not
linear in money.
Amounts assigned different values in
different circumstances
Assumption: for firms profit is linear in
money
Treat money as cardinal
(unique up to positive affine
transformations)
Money is numerically measurable
Expected Payoff weighted average
(e.g. gambling and indifference)
Rationality
We assume players can
i. assess outcomes
ii.Perfectly calculate paths to
outcomes
iii. choose action that yields most
preferred outcomes
Implicitly assume players know
their own interests
Not a perfect assumption,
limitations, but good enough for a
basis
Short-run thinkers
Same value system
Sensible
Rational Agents
An agent is any rational
entity, examples:
i. a person
ii.a firm
iii.a non-human animal
iv.a plant
v.a labour union
vi.a brain cell
The first confounding assumption is that humans
are, rational agents. A rational agent always chooses to
perform the action that results in the optimal outcome
for itself from among all feasible actions, according to
good ol Wikipedia. Basically, a rational agent has beliefs
and desires, and draws upon these beliefs in an attempt
to satisfy their desires.
All very mechanical, very rational, very Mr Spock.
http://ockhamsbeard.wordpress.com/category/philosop
hy/ethics/page/8/
Defining Games
Games consist of:
i. list of players
ii.strategies available to players
iii. all possible outcomes
iv. payoffs
v. assumption players are
rational
vi.rationality is common
knowledge
Solutions?
What happens when players
strategies interact?
In Classical Game Theory
Players respond optimally to
one another - get Nash
Equilibrium
Doesnt mean things are
always for the best
Prisoners dilemma
Doesnt necessarily mean
things dont change:
- In Evolutionary Game Theory
equilibrium concept is
different it must be
evolutionarily stable
- backdoor justification
Equilibrium (for later)
An equilibrium is always a vector (list) of strategies
Always a vector for each player
Some players may not do well in equilibrium, but they would do
worse if they deviated.
We are interested in the stability of an equilibrium
Some games have a single, unique equilibrium
Other game (most) have multiple equilibria
The big picture, empirics
THEORY
EXPERIMENTS
Validate
Contradict
Put to the test
Developments