Game theory is a strategic approach to understanding interactive situations. It examines how individuals make decisions in contexts where outcomes depend on the decisions of others. Key components of game theory include players, rules, strategies, and payoffs. Static games analyze single-shot interactions, while repeated games consider how cooperation can emerge over multiple iterations if players use strategies like tit-for-tat that punish non-cooperation but also forgive. Sequential games incorporate timing of moves, and concepts like backward induction help analyze them. Real-world applications of game theory include how to establish cooperation between parties and the value of commitment devices for changing strategic incentives.
2. Outline
Concept of game theory
Static games
Repeated games
Sequential games
Game theory in the real world
3. What is Game Theory?
○ it is not another useless theory
○ it is not just useful for trivial games
○ it is not just for mathematical egg heads
○ . “Game theory is a tool for exploring and
understanding situations laced with strategic
reasoning”
- Joe Harrington (Johns Hopkins University)
KEY DEFINING WORDS:
STRATEGIC AND INTERACTION
5. You probably know some intuitively
... good result,
given the ... let’s shift the
circumstances. goalposts.
... they had no ... I’m keeping
other option. ... the result
was inevitable. my powder dry.
... gaming the ... launched a
... they burned pre-emptive
system ... they’re own strike.
bridge.
... need to ... swimming
... tit-for-tat
manage against the
strategy.
expectations. school.
6. Questions for game theory
● Why does the Westminster
system of parliamentary
democracy generate conflict?
● Why did Neville Chamberlain
sign the Munich Agreement with
Adolf Hitler?
● How hard should you work on a
team project at university?
● In a penalty kick situation in
soccer, is there any advantage
from kicking the ball to the right
or to the left?
7. A Game Theorist Plays Trump Card
Why would the CEO of Australia’s
biggest coal miner support a
carbon tax?
ANSWER: GAME THEORY
8. Paper, scissors, rock
SCISSORS
PAPER
ROCK
ROCK
● Is it strategic? NO
● Is it interactive? NO
10. A simple example
● Did you develop a strategy?
● Did it work or not work?
● How was this different to the first game with the tape recorder?
11. A few assumptions
● Each player is rational
● Each player knows the full extent
to which each other player is
rational
● Each player knows the potential
pay-offs for themselves and
others
● Each player knows the rules of
the game
Rational actors are those that
construct the most efficient or cost-
effective means to achieve their
specific goal.
12. Key components
Players
individuals, firms, organisations and governments
Rules
contracts, laws, regulations and customary agreements
Strategies
bidding in an auction, running for election, filing a lawsuit, paying a bribe
Pay-offs
winning an auction, losing a job, going to jail, receiving compensation
13. Outline
Concept of game theory
Static games
Repeated games
Sequential games
Game theory in the real world
14. M&M Challenge
● You have saved up your whole
life a delicious nest egg of 50
M&Ms
● Government wants to incentivise
M&M saving so it offers
individuals the opportunity of
depositing your M&Ms in a joint
super M&M fund
● Government will top-up the joint
account with 3 times the M&Ms
in the fund and distribute them
the same amount to all who
contributed
● How many M&Ms will you put in
the fund?
15. Prisoner’s dilemma
● Two thieves are caught and
interrogated separately
● If both thieves stay quiet
they will avoid any charges
● If both thieves confess they
will each get 8 years
● If one dobs in the other he
walks free while his partner
gets 10 years
● What do you think is going
to happen?
http://www.youtube.com/watch?v=ED9gaAb2BEw
21. Two very important concepts
A dominated strategy is a move that always bears outcomes
inferior to another, no matter what the other player does.
22. Two very important concepts
A Nash Equilibrium is a strategy profile with the property that no
player can do better by choosing a different strategy.
23. Gaining cooperation
Typically techniques for promoting coordination fall into two categories:
altering the pay-offs or changing the rules of the game.
○ Coercion and punishment
○ Pre-commitment devices and contracts
○ Selective incentives
○ Positive reputation
○ Establishing trust
○ Repeating the game
○ Players move sequentially
24. Outline
Concept of game theory
Static games
Repeated games
Sequential games
Game theory in the real world
25. Repeated games
● In reality, games are rarely one-off events
● In general cooperation can be sustained over time if
● Can you think of some examples where this would be the case?
● What do you think could happen when the relation starts to come to an
end?
26. Tit-for-tat strategy
● An academic tournament was held in
1980 to test which strategy performs
the best over repeated Prisoner’s
Dilemmas
● The outstanding strategy was Robert
Axelrod’s tit-for-tat strategy that follows
some simple rules:
○ Unless provoked, a player will
always cooperate
○ If provoked, a player will retaliate
○ The agent is quick to forgive
● Whilst defecting is the optimal solution
in a one-off Prisoner’s Dilemma, the tit-
for-tat strategy has a ‘disciplining’ effect
on any other mindful player that
encourages cooperation
27. Outline
Concept of game theory
Static games
Repeated games
Sequential games
Game theory in the real world
28. Centipede Game
● There are two bowls of M&Ms –
one with one M&M and one with
four
● Your team can choose to take
the bigger pile (leaving the other
team with the smaller pile) or
passing
● Passing the piles causes them to
double
29. United States example
● In the United States, the
Congress needs to decide on a
new carbon tax to applied to
large energy producers. The
current rate is $15 per tonne of
carbon emitted.
● The Senate Committee on
Energy and Natural Resource’s
preferred tax is $18 per tonne.
Once Committee proposes a bill,
the legislature is free to amend it
before taking a final vote.
○ What will the Committee do if
the Senate’s preferred policy
is $25 per tonne?
○ What about $14 per tonne?
32. Commitment devices
"a means with which to lock yourself into a course of action
that you might not otherwise choose but that produces a
desired result" (Dubner and Levitt 2007)
33. Military example
● Norway’s army must decide
whether to attack Sweden’s,
which is occupying an island
between the two countries.
● In the event of an attack,
Sweden may fight, or retreat
over a bridge to its mainland.
Each army prefers to occupy the
island than not to occupy it; a
fight is the worst outcome for
both armies.
● What changes if Sweden’s army
burns the bridge back to its
mainland, cutting off its only
method of retreat?
36. Outline
Concept of game theory
Static games
Repeated games
Sequential games
Game theory in the real world
37. Into the real world
● Small pay-offs
● Uncertain future outcomes
● Long-term and repeated games
● Behavioural and mental limits
38. Fleggie’s final tips
● Consider others’ strategies before considering your own
● History means very little. Always be forward-looking and anticipatory
● Always consider how much actual ability you have to influence a final
outcome
● Timing is everything, and it’s not always better to move second
● Change the rules, changes the outcome
39. Final tips on strategy
● Never forget the status quo is itself a strategy
● Look for dominated strategies that you can take off the table early
● Also look for inevitable outcomes. If you can embrace an inevitable
outcome, albeit negative, you might be in a position to minimise its
impact
● Be wary of other players’ publicly released comments. Often they have
strong incentives to misrepresent their preferences
● Don’t be afraid to use a firm yet forgiving tit-for-tat strategy. It is a
proven strategy for cooperation in a broad range of contexts
We’ve all played Risk before.What is the goal of risk: world domination.How do you (hopefully) get there? By strategically deciding on when and with whom to cooperate and when and with whom to bring on conflict.
The Government preferred ETS TAX NOTHING (Rudd and Gillard promising “no tax”) then it switched to TAXETSNOTHING. NOTHING was least likely. BHP preferred TAX NOTHING ETS (if it was without uranium it might have been NOTHING TAX ETS)A broad-based carbon tax, he said, would affect BHP's business if there was "no rebating for trade-exposed industries".A BHP spokesman confirmed that Mr Kloppers believed there should be "some form of treatment" to recognise export sector industries under the carbon tax, echoing growing calls for special deals across the economy, including from the steel industry, cement manufacturers, food and groceries, oil, gas and aluminium.
What would happen if the depositors held personal accounts in the fund? What would change?
EXAMPLES: arms race, global climate change agreements, fall in trade union membershipMany other examples. Can you think of some?
Player A and Player B. Each player has a penny and must secretly turn the penny to heads or tails. The players then reveal their choices simultaneously. If the pennies match (both heads or both tails) Player A keeps both pennies, so wins one from Player B (+1 for A, -1 for B). If the pennies do not match (one heads and one tails) Player B keeps both pennies, so receives one from Player A (-1 for A, +1 for B). This is an example of a zero-sum game, where one player's gain is exactly equal to the other player's loss.This game has no pure strategyNash equilibrium since there is no pure strategy (heads or tails) that is a best response to a best response. EXAMPLE: paper, scissors, rock
two individuals go out on a hunt. Each can individually choose to hunt a stag or hunt a hare. Each player must choose an action without knowing the choice of the other. If an individual hunts a stag, he must have the cooperation of his partner in order to succeed. An individual can get a hare by himself, but a hare is worth less than a stag. This is taken to be an important analogy for social cooperation.
Imagine a couple that agreed to meet this evening, but cannot recall if they will be attending the opera or a football match. The husband would most of all like to go to the football game. The wife would like to go to the opera. Both would prefer to go to the same place rather than different ones. If they cannot communicate, where should they go?This game has two pure strategyNash equilibria, one where both go to the opera and another where both go to the football game.
The game of chicken models two drivers, both headed for a single lane bridge from opposite directions. The first to swerve away yields the bridge to the other. If neither player swerves, the result is a potentially fatal head-on collision. It is presumed that the best thing for each driver is to stay straight while the other swerves (since the other is the "chicken" while a crash is avoided). Additionally, a crash is presumed to be the worst outcome for both players. This yields a situation where each player, in attempting to secure his best outcome, risks the worst.http://www.youtube.com/watch?v=rExm2FbY-BE&NR=1
Coercion and punishment – tax evasion punishmentPre-commitment devices – coal purchase orders and airport/airlinesSelective incentives – Growcom Reputation – selling a lemon on ebay or a car (use reputation reporting highly effective - if the word gets out his business will dry up)Establishing trust – small communities
Compare the risks in a one-off sale of a lemon car compared with a fruit wholesaler who sells to a restaurant every day?
In 1980, Robert Axelrod, professor of political science at the University of Michigan, held a tournament of various strategies for the prisoner's dilemma. He invited a number of well-known game theorists to submit strategies to be run by computers. In the tournament, programs played games against each other and themselves repeatedly. Each strategy specified whether to cooperate or defect based on the previous moves of both the strategy and its opponent.
Consider two players: Alice and Bob. Alice moves first. At the start of the game, Alice has two piles of coins in front of her: one pile contains 4 coins and the other pile contains 1 coin. Each player has two moves available: either "take" the larger pile of coins and give the smaller pile to the other player or "push" both piles across the table to the other player. Each time the piles of coins pass across the table, the quantity of coins in each pile doubles. For example, assume that Alice chooses to "push" the piles on her first move, handing the piles of 1 and 4 coins over to Bob, doubling them to 2 and 8. Bob could now use his first move to either "take" the pile of 8 coins and give 2 coins to Alice, or he can "push" the two piles back across the table again to Alice, again increasing the size of the piles to 4 and 16 coins. The game continues for a fixed number of rounds or until a player decides to end the game by pocketing a pile of coins.
Why do you think is going to happen?
What do you think is going to happen?Now you can see why the US Congressional committees are so incredibly powerful!
What do you think is going to happen?Now you can see why the US Congressional committees are so incredibly powerful!
What do you think is going to happen?Now you can see why the US Congressional committees are so incredibly powerful!