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Math Intro: Matrix Form Games and Nash Equilibrium

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Let’s start with an informal discussion of what a game is and when it’s useful…

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Components of a game: Players E.g., animals, people, firms, countries Strategies E.g., attack Syria, feed brother, have sons Payoffs E.g., offspring, $, happiness Depend on Your strategy Others’ strategies

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Games are used to describe situations in which payoffs don’t just depends on your actions, but on others’ too Games are useful: whether to read Freakonomics or the Selfish Gene Not needed: whether to choose chocolate or vanilla soft-serve

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Let’s add a bit of formalization Let’s start by making some simplifying assumptions (some of which we’ll relax later in the course; and all of which can be relaxed)…

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We’ll restrict to a finite number of strategies Yes: Should I press the gas pedal or the break? Not: How much should I push the gas pedal? In this class, almost always, we’ll have just 2 players Players move simultaneously Yes: Moshe and Erez both decide what color shirt to wear each morning Not: Erez decides what color shirt to wear after seeing whether Moshe wore black again Then, can present using payoff “matrix” Games that can be presented this way are called “Matrix Form Games” Let’s do this for three famous examples…

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Prisoners’ Dilemma 3 is the cost of cooperation 5 is the benefit if partner cooperates 2, 2-3,5 5, -30, 0 C D CD

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Prisoners’ Dilemma c>0 is the cost of cooperation b>c is the benefit if partner cooperates b-c, b-c-c, b b, -c0, 0 C D CD

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Prisoners’ dilemma useful for studying “cooperation” E.g., Voting Love Charity “Prosocial” “Altruism”

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Coordination Game Both better off if play the same: a > c, d > b Can have d > a or vice versa a,ab,c c,bd,d L R LR

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Coordinate game useful for studying E.g., Should we attack Syria? Should we enforce a norm against chemical weapons? Should we drive on the left? Innuendos

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Hawk-Dove Object worth v>0 Cost of fighting c>v Get object if only H, o/w split (v/2)-cv 0v/2 H D HD

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Hawk-Dove useful for studying E.g., Territoriality Rights Apologies

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Next, let’s see how we solve matrix form games…

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What makes this hard is that player 1’s optimal choice depends on what player 2 does And player 2’s optimal choice depends on what player 1 does So where do we start?

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Nash solved this Nash equilibrium specifies a strategy pair such that no one benefits from deviating… … provided no one else deviated I.e., ceteris parabus, or holding everyone’s actions fixed

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Let’s go back and solve for the Nash equilibria of our three example games

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Prisoners’ Dilemma c>0 is the cost of cooperation b>c is the benefit if partner cooperates b-c, b-c-c, b b, -c0, 0 C D CD

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Coordination Game Both better off if play the same: a > c, d > b Can have d > a or vice versa a,ab,c c,bd,d L R LR

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Hawk-Dove Object worth v>0 Cost of fighting c>v Get object if only H, o/w split (v-c)/2v 0v/2 H D HD

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Note that Nash doesn’t pick out socially optimal solution E.g., In PD, NE is (D,D) even though social optimum is (C,C) In coordination game, both (L,L) and (R,R) are equilibria even if one yields higher payoffs for everyone

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What this means for us… Recall our thesis: Preferences/ideologies that are learned will end up being consistent with Nash This means that if Nash is inefficient, our preferences/ideologies will be as well! More generally, if Nash has some weird, counterintuitive property, so will our preferences. This will explain many of our puzzles

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Finally, let’s discuss some notation that you should be familiar with, and which we will use towards the end of the class

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s 1 is a strategy available to player 1 E.g., Cooperate Right Hawk S 1 is the set of all available strategies available to player 1 E.g., {Cooperate, Defect} {Left, Right} {Hawk, Dove}

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u 1 is the payoff to player 1 Remember that it depends on player 1’s strategy and player 2’s strategy So we write, u 1 (s 1, s 2 ) E.g., u 1 (C,D) = -c u 2 (H,D) = 0

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Finally, we’re ready to define Nash A Nash equilibrium is a strategy pair (s 1, s 2 ) such that: u 1 (s 1,s 2 ) ≥ u 1 (s 1 ’,s 2 ) for any s 1 ’ in S 1 and u 2 (s 1,s 2 ) ≥ u 1 (s 1,s 2 ’) for any s 2 ’ in S 2

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That’s enough formalization for now. We’ll add a little more here and there as we need it When the time comes, we’ll learn how to deal with games where: Players don’t move simultaneously The game repeats Players don’t have “complete information” While we won’t need to go here, you should just be aware that game theory generalizes further. E.g., Continuous strategies More than two players “Mixing”

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APEC 8205: Applied Game Theory Fall 2007

APEC 8205: Applied Game Theory Fall 2007

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