INFORMAL INTRODUCTION TO GAME THEORY

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Game Theory deals with conflict situations. A conflict situation (game) is a

situation in which two or more individuals (players) interact and thereby jointly
determine the outcome. Each participating player can partially control the situation, but no player has full control. They interact with one another, each one in an
effort to obtain that outcome that is most profitable for him.
The aim of game theory is to provide a solution (a characterization of rational
behavior ) for every game.
Traditionally, games have been divided into two classes: cooperative games and
noncooperative games. We restrict ourselves to noncooperative games. A noncooperative game is played without any possibility of communication, correlation or
(pre)commitment, except for those that are explicitly allowed by the rules of the
game. Hence, all relevant aspects of the game should be captured by the rules of
the game.
A solution in a nooncooperative game is a set of recommendations, which tell
each player how to behave. This solution should be consistent, i.e. no player should
have an incentive to deviate from his recommendation. Hence, a solution must be
self-enforcing: As long as every player follows his recommendation, it should not
be in my interest to deviate.
1
L

2
a
2, 1

1, 3

0, 0

Figure 1. A perfect information game.

Example 1 (Backwards Induction). Consider the game in Figure 1. The rules of
the game are as follows. The game starts with player 1 choosing between L and R.
If player 1 chooses R the game ends, player 1 gets a payoff equal to 1 and player
2 gets a payoff equal to 3. If player 1 chooses L the game continues and it is now
player 2s turn to move. Player 2 can choose either a or b. If player 2 chooses a the
game ends, player 1 gets 2 and player 2 gets 1. If player 2 chooses b the game also
ends and both player 1 and player 2 get a payoff equal to 0.
Given such a game, is the strategy profile (R, b) (i.e. player 1 moves R and
player 2 would choose b in case he was called to move) a good solution? It is,
at least, a Nash equilibrium. No player can improve by unilaterally deviating from
such a description.
1

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Not Confess
Confess

Not Confess
10, 10
11, 0

Confess
0, 11
3, 3

Figure 2. Prisoners Dilemma.

Player 1 plays R because he believes that if he played L player 2 would choose b
and he would get a payoff equal to 0 instead of 1 that he can guarantee by moving
R. Player 2 plays b because, given that player 1 is playing R, whatever he plays
cannot change his payoff.
Should player 1 believe player 2s threat? It does not look so. Player 2 will
obviously move a whenever he has to move. Therefore, player 1 can anticipate this
and deviate to L. In other words, the only strategy profile that satisfies backwards
induction is (L, a).
Example 2 (Prisoners Dilemma). Two suspects are partners in a major crime
who have been captured by the police. Each suspect is placed in a separate cell,
and offered the opportunity to confess to the crime. If neither suspect confesses,
they can still be convicted of a minor crime and they will spend a shot period of
time in prison (for whatever reason, this will give each of them a payoff equal to
10). However, if one prisoner confesses and the other does not, the prisoner who
confesses testifies against the other in exchange for going free (which gives him a
payoff equal to 11), while the prisoner who did not confess goes to prison for a long
term (which gives him a payoff equal to 0). If both prisoners confess, then both are
given a reduced term, but both are convicted, which we represent by giving each 3
units of utility: better than having the other prisoner confess, but not so good as
going free. The game is represented in Figure 2.
The most attractive strategy combination is (Not Confess, Not Confess). However, a sensible theory cannot prescribe this strategy profile as a solution. Suppose
it is suggested to play (Not Confess, Not Confess), each player has an incentive to
disobey his recommendation as long as he expects his opponent to obey it.
Suppose prisoner 1 confesses. Prisoner 2 is better off confessing than not. The
same is true if prisoner 1 does not confess. This reasoning implies that prisoner
1 should confess. The argument that shows that prisoner 2 should also confess is
analogous. Game Theory has to prescribe (Confess, Confess) as the solution in a
noncooperative context.
1
L

R
2

a
2, 1

b
0, 0

a
1, 3

L
R

a
2, 1
1, 3

b
0, 0
1, 3

1, 3

Figure 3. A simultaneous move game derived from the game in Figure 1.

Example 3 (Admissible Equilibria). Consider now the game in Figure 3. The
figure offers an extensive form and a normal form representation of the same game.

INFORMAL INTRODUCTION TO GAME THEORY

The rules of the game are as follows. Player 1 has to choose between L and R, and
player 2 has to choose between a and b. Each of them has to make a choice without
knowing the other players choice. Payoffs are as described in the figure.
The game is a modification of the game in Figure 1. Player 2 is now called
to move regardless of player 1s choice, but his choice is only relevant in terms of
payoffs if player 1 plays L.
Is now (R, b) a good solution of the game?
Let us pose the question in different terms. Do the games in Figure 1 and Figure 3
represent the same strategic situation? Our answer must be yes. In either case,
player 1 and player 2 know that player 2s strategy choice is only relevant in case
player 1 chooses L. Consequently, the strategy profile (R, b) cannot be considered
a good set of recommendations.
More generally, a transformation of the game tree like the one applied in the
current example is irrelevant for correct decision making. The transformed tree is
merely a different presentation of the same decision problem, and decision theory
should not be misled by presentation effects. Otherwise we would be saying that
decision theory and game theory are useless in real-life applications, where problems
present themselves without a specific formalism such as a tree.
But the argument that we used in Figure 1 to discredit (R, b) cannot be used in
Figure 3 because when player 2 has to move he does not know whether player 1 has
played R or L. If our previous reasoning is valid then there must be an argument
that applied solely to the game as represented in Figure 3 would discredit the
strategy profile (R, b). Such an argument is the following: Why would player 2
play strategy b? After all strategy b is never strictly better than strategy a, and
sometimes (when player 1 plays L) is strictly worse. We say that strategy b is
(weakly) dominated by strategy a.
In any case, notice that, as in the game of Figure 1, (R, b) is a Nash equilibrium.
Also notice that the strategy profile (L, a) is a Nash equilibrium too, but in this
equilibrium all players are using admissible (i.e. not dominated) strategies.

Appendix A. Tutorial Questions

Exercise 1. Write down the normal form representation of the following games
and find all Nash equilibria, in pure and mixed strategies.
The Battle of the Sexes Husband and wife agree to meet this evening, but cannot recall if they
will be attending the opera or a boxing match. He prefers the boxing
match and she prefers the opera, though both prefer being together to
being apart. They are in separated locations and cannot communicate by
any means. Each of them has to decide where to go. Suppose that meeting
their partners in their favorite event pays 3, while meeting their partners
to the other event pays 1. If they do not meet they both get a payoff equal
to 0.
Matching Pennies Two children first select who will be represented by same and who will be
represented by different. Then, each child conceals in his palm a penny
either with its face up or face down. Both coins are revealed simultaneously.
If they match (both are heads or both are tails), the child same wins. If
they are different (one heads and one tails), different wins. Let us assume
that the winner gets a payoff equal to 1 and the loser a payoff equal to 1.

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The Game of Chicken Two people take their cars to opposite ends of a narrow road and start
to drive toward each other. The one who swerves to prevent collision is
the chicken and the one who keeps going straight is the winner. Let the
payoff to the chicken be 1 and the payoff to the winner 1. If they both
swerve they get a payoff equal to 0. If nobody swerves they both get a
payoff equal to 2.
The Stag Hunt Game Each of two hunters has two options: he may remain attentive to the pursuit
of a stag, or he may catch a rabbit. If both hunters pursue the stag, they
catch it and share it equally, giving each a payoff equal to 2. If one of the
hunters devotes his energy to catching a rabbit, he catches the rabbit but
the stag escapes. Catching the rabbit gives a payoff equal to 1 and catching
no prey gives a payoff equal to 0.
Rock, Paper, Scissors Two children simultaneously make one of three symbols with their fists a rock, paper, or scissors. Simple rules of rock breaks scissors, scissors
cut paper, and paper covers rock dictate which symbol beats the other. If
both symbols are the same, the game is a tie. Similar to the two-strategy
Matching Pennies game. Let us assume that the winner gets a payoff equal
to 1 and the loser a payoff equal to 1. If they tie they both get a payoff
equal to 0.