Introduction to Game Theory

3a. More on Normal-Form Games

Dana Nau University of Maryland

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More Solution Concepts

!! Last time, we talked about several solution concepts
!! Pareto optimality !! Nash equilibrium !! Maximin and Minimax !! Dominance !! Rationalizability

!! Well continue with several more

!! Trembling-hand perfect equilibrium !! !-Nash equilibrium !! Rationalizability !! Evolutionarily stable strategies

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Trembling-Hand Perfect Equilibrium

!! A solution concept thats stricter than Nash equilibrium !! Trembling hand: Requires that the equilibrium be robust against slight

errors or trembles by the agents

!! I.e., small perturbations of their strategies

!! Recall: A fully mixed strategy assigns every action a non-0 probability !! Let S = (s1, , sn) be a mixed strategy profile for a game G !! S is a (trembling hand) perfect equilibrium if there is a sequence of fully

mixed-strategy profiles S0, S1, , that has the following properties:

!! lim k!" Sk = S !! for each Sk = (s1k, , sik, , snk), every strategy sik is a best response to

the strategies S#ik

!! The details are complicated, and I wont discuss them

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!-Nash Equilibrium
!! Another solution concept
!! Reflects the idea that agents might not change strategies if the gain would

be very small
!! Let ! > 0. A strategy profile S = (s1, . . . , sn ) is an !-Nash equilibrium if, for

every agent i and for all strategies si" $ si, ui (si , S!i ) % ui (si", S#i ) # !

!! !-Nash equilibria always exist

!! Every Nash equilibrium is surrounded by a region of !-Nash equilibria

for any ! > 0

!! This concept can be computationally useful
!! Algorithms to identify !-Nash equilibria need consider only a finite set of

mixed-strategy profiles (not the whole continuous space)

!! Because of finite precision, computers generally find only !-Nash

equilibria, where ! is roughly the machine precision

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Problems with !-Nash Equilibrium

!! For every Nash equilibrium, there are !-Nash equilibria that approximate it, but the

converse isnt true

!! There are !-Nash equilibria that arent close to any Nash equilibrium

!! Example: the game at right has just one Nash equilibrium: (D, R)
!! We can use strategy elimination to get it:

! D dominates U for agent 1 ! On removing U, R dominates L for agent 2

!! (D, R) is also an !-Nash equilibrium !! But theres another !-Nash equilibrium: (U, L)
!! In this equilibrium, neither agents payoff

is within ! of the agents payoff in a Nash equilibrium

!! Problem:
!! In the !-Nash equilibrium (U, L), agent 1 cant gain more than ! by deviating !! But if agent 1 deviates, agent 2 can gain more than ! by best-responding to

agent 1s deviation

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Problems with !-Nash Equilibrium

!! Some !-Nash equilibria are very unlikely to arise
!! Agent 1 might not care about a gain of !/2, but might reason as follows:

! Agent 2 may expect agent 1 to to play D since it dominates U ! So agent 2 is likely to play R ! If agent 2 plays R, agent 1 does much better by playing D rather than U
!! In general, !-approximation is much messier

in games than in optimization problems

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Rationalizability
!! A strategy is rationalizable if a perfectly rational agent could justifiably

play it against perfectly rational opponents

!! The formal definition is complicated !! Informally, a strategy for agent i is rationalizable if its a best response to

some beliefs that agent i could have about the strategies that the other agents will take
!! But agent is beliefs must take into account is knowledge of the

rationality of the others. This incorporates ! the other agents knowledge of is rationality, ! their knowledge of is knowledge of their rationality, ! and so on ad infinitum
!! A rationalizable strategy profile is a strategy profile that consists only of

rationalizable strategies

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Example
Matching Pennies
!! Agent 1s pure strategy Heads is rationalizable
!! Lets look at the chain of beliefs

Heads Heads 1,1

Tails 1, 1

Tails

1, 1

1,1

!! For agent 1, Heads is a best response to agent 2s pure strategy Heads, !! and believing that 2 would also play Heads is consistent with 2s

rationality, for the following reasons

!! 2 could believe that 1 would play Tails, to which 2s best response is

Heads;
!! and it would be rational for 2 to believe that 1 would play Tails, for

the following reasons: ! 2 could believe that 1 believed that 2 would play Tails, to which Tails is a best response;

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Strategies that arent rationalizable

Prisoners Dilemma
!! Strategy C isnt rationalizable for agent 1
!! It isnt a best response to any

3, 3

0, 5

of agent 2s strategies
5, 0 1, 1

The 3x3 game we used earlier

!! M is not a rationalizable strategy for agent 1
!! It is a best response to one of agent 2s

strategies, namely R
!! But theres no belief that agent 2 could have

about agent 1s strategy for which R would be a best response

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Comments
!! The formal definition of rationalizability is complicated because of the

infinite regress
!! But we can say some intuitive things about rationalizable strategies

!! Nash equilibrium strategies are always rationalizable

!! So the set of rationalizable strategies (and strategy profiles) is always

nonempty
!! In two-player games, rationalizable strategies are simply those that survive

the iterated elimination of strictly dominated strategies

!! In n-agent games, this isnt so
!! Rather, rationalizable strategies are those that survive iterative removal

of strategies that are never a best response to any strategy profile by the other agents
!! Example: the p-beauty contest

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The p-Beauty Contest

!! At the start of my first class, I asked you to do the following:
!! Choose a number in the range from 0 to 100 !! Write it on a piece of paper, along with your name !! In a few minutes, Ill ask you to pass your papers to the front of the

room
!! After class, Ill compute the average of all of the numbers !! The winner(s) will be whoever chose a number thats closest to 2/3 of

the average
!! Ill announce the results in a subsequent class

!! This game is famous among economists and game theorists

!! Its called the p-beauty contest !! I used p = 2/3
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The p-Beauty Contest

!! Recall that in n-player games,
!! Rationalizable strategies are those that survive iterative removal of

strategies that are never a best response to any strategy profile by the other agents
!! In the p-beauty contest, consider the strategy profile in which everyone else

chooses 100
!! Every number in the interval [0,100) is a best response !! Thus every number in the interval [0,100) is rationalizable

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Nash Equilibrium for the p-Beauty Contest

!! Iteratively eliminate dominated strategies
!! All numbers & 100 => 2/3(average) < 67

=> any strategy that includes numbers % 67 isnt a best response to any strategy profile, so eliminate it
!! The remaining strategies only include numbers < 67

=> for every rationalizable strategy profile, 2/3(average) < 45 => any strategy that includes numbers % 45 isnt a best response to any strategy profile, so eliminate it
!! Rationalizable strategies only include numbers < 45

=> for every rationalizable strategy profile, 2/3(average) < 30 ...

!! The only strategy profile that survives elimination of dominated strategies:
!! Everybody chooses 0 !! Therefore this is the unique Nash equilibrium

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p-Beauty Contest Results

!! (2/3)(average) = 21 !! winner = Giovanni

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Another Example of p-Beauty Contest Results

!! Average = 32.93 !! 2/3 of the average = 21.95 !! Winner: anonymous xx

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We arent rational
!! Most of you didnt play Nash equilibrium strategies !! We arent game-theoretically rational agents !! Huge literature on behavioral economics going back to about 1979
!! Many cases where humans (or aggregations of humans) tend to make

different decisions than the game-theoretically optimal ones

!! Daniel Kahneman received the 2002 Nobel Prize in Economics for his

work on that topic

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Choosing Irrational Strategies

!! Why choose a non-equilibrium strategy?
!! Limitations in reasoning ability

! Didnt calculate the Nash equilibrium correctly ! Dont know how to calculate it ! Dont even know the concept
!! Hidden payoffs

! Other things may be more important than winning ! Want to be helpful ! Want to see what happens ! Want to create mischief
!! Agent modeling (next slide)

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Agent Modeling
!! A Nash equilibrium strategy is best for you

if the other agents also use their Nash equilibrium strategies

!! In many cases, the other agents wont use Nash equilibrium

strategies
!! If you can forecast their actions accurately, you may be

able to do much better than the Nash equilibrium strategy

!! Ill say more about this in Session 9
!! Incomplete-information games

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Evolutionarily Stable Strategies

!! An evolutionarily stable strategy (ESS) is a mixed strategy thats resistant to

invasion by new strategies

!! This concept comes from evolutionary biology !! Consider how various species relative fitness causes their proportions of the

population to grow or shrink

!! For us, an organisms fitness = its expected payoff from interacting with a

random member of the population

!! An organisms strategy = anything that might affect its fitness

! size, aggressiveness, sensory abilities, intelligence,

!! Suppose a small population of invaders playing a different strategy is added to a

population
!! The original strategy is an ESS if it gets a higher payoff against the mixture of

the new and old strategies than the invaders do

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r' b d

Evolutionary Stability
!! Let G be a symmetric 2-player game !! Recall that the matrix shows u(r,r') = payoff for r against r'
!! A strategy r' invades a strategy r at level x if

a c

r'

fraction x of the population uses r' and fraction (1x) of the population uses r
!! fitness(r) = expected payoff for r against a random member of the population

= (1x)a + xb
!! Similarly, fitness(r') = (1x)c + xd

!! r is evolutionarily stable against r' if there is an ! > 0

such that for every x < !, fitness(r) > fitness(r')

!! i.e.,

(1x)a + xb

>

(1x)c + xd

!! As x # 0, (1x)a + xb # a and (1x)c + xd # c

!! For sufficiently small x, the inequality holds if either a > c, or a = c and b > d

!! Thus r is evolutionarily stable against r' iff one of the following holds:
!! a > c !! a = c and b > d
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r' b d

Evolutionary Stability
!! More generally !! Well use a mixed strategy s to represent a population that is composed of several different species
!! s is evolutionarily stable iff for every mixed strategy s' $ s,

a c

r'

!! Well talk about ss evolutionary stability against all other mixed strategies one of the following holds: ! u(s,s) > u(s',s) ! u(s,s) = u(s',s) and u(s,s') > u(s',s') !! s is weakly evolutionarily stable iff for every mixed strategy s" $ s, one of the following holds: ! u(s,s) > u(s',s) ! u(s,s) = u(s',s) and u(s,s') > u(s',s')
!! Includes cases where the original strategy and invading strategy have the same

fitness, so the population with the invading strategy neither grows nor shrinks

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Example
!! The Hawk-Dove game
!! 2 animals contend for a piece of food !! The animals are chosen at random from the entire population

! Each animal may be either a hawk (H) or a dove (D)

!! The prize is worth 6 to each !! Fighting costs each 5

!! When a hawk meets a dove, the hawk gets the prize without a fight:

payoffs 6, 0
!! When 2 doves meet, they split the prize without a fight: payoff 3, 3
!! When 2 hawks meet, they fight (5 for each), each with a 50% chance

of getting the prize ((0.5)(6) = 3): payoffs 2,2

!! Its easy to show that this game has a unique Nash equilibrium (s, s),

where s = (3/5, 2/5)

!! i.e., 60% hawks, 40% doves
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Example
!! To confirm that s is also an ESS, show that, for all s" $ s,

u1(s, s") = u1(s", s) and u1(s, s") > u1(s", s")

!! u1(s,s") = u1(s",s) is true of any mixed strategy equilibrium with full support

!! To show u1(s,s") > u1(s",s"), find the s" that minimizes

f (s!) = u1(s,s") # u1(s",s")

!! s = play H with probability 3/5, D with probability 2/5 !! s" = play H with probability p, D with probability 1p !! u1(s,s') = (3/5)[2p + 6(1p)] + (2/5)[0p + 3(1p)] !! u1(s',s') = p[2p + 6(1p)] + (1p)[0p + 3(1p)] !! so f (s!) = u1(s,s") # u1(s",s") is quadratic in p !! Set d f(s')/d p = 0, solve for p => p = 3/5

! So the unique minimum occurs when s" = s

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Evolutionary Stability and Nash Equilibria

Theorem. Let G be a symmetric 2-player game, and s be a mixed strategy. If s is an evolutionarily stable strategy, then (s, s) is a Nash equilibrium of G. Proof. By definition, an ESS s must satisfy u(s,s) % u(s",s), i.e., s is a best response to itself, so it must be a Nash equilibrium. Theorem. Let G be a symmetric 2-player game, and s be a mixed strategy. If (s,s) is a strict Nash equilibrium of G, then s is an evolutionarily stable strategy. Proof. If (s,s) is a strict Nash equilibrium, then u(s,s) > u(s",s).
!! This satisfies the first of the two alternative criteria of an ESS

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Summary
!! Weve discussed several more solution concepts
!! trembling-hand perfect equilibria !! epsilon-Nash equilibria !! rationalizability

! the p-Beauty Contest

!! evolutionarily stable strategies

! Hawk-Dove game

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