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Sep 02, 2015

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games theori and games again nature

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games theori and games again nature

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Topic #3

In game theory, for reasons that will be explained later,

the alternatives (e.g., LEFT and RIGHT) that each player

chooses from are usually called strategies,

but they may also be called choices, actions, etc.

a 1-player game, in which a single rational self-interested player

must choose a strategy, and

the outcome and the players payof depends on both his

chosen strategy and the choice made by a totally

disinterested nature.

decision theory (rather than game theory) because

there is only one player who

makes a rational choice, and

is interested in (gets a payoff, i.e., a gain or loss, from) the

outcome.

Uncertainty

Choices for P1

s1

s2

s3

s4

s5

x

y

z

v

w

=>

Outcomes

=>

Preferences/Payoffs/Utility

u1(x) = 4

u2(y) = 5

u3(z) = 3

u4(v) = 4

u5(w) = 3

P1 should choose the strategy that gives him the best

outcome,

practice, because the decision maker may not know how to

predict or evaluate the payofs from the different outcomes,

research, not strategic choice.

strategic choice, and assumes that all players know

their payoffs.

Nature

strategies and Natures contingencies (or another

players strategies).

This is the simplest possible non-trivial matrix , with two rows

and two columns.

payoff (or at least rank the payoffs) to each player

given by the resulting outcome.

In this case, there is only one number in each cell because

there is only one player, and

nature is indifferent among outcome and has no payoffs.

(some of which may be poor principles) that player P1

might use in order to pick his strategy.

The Maximax Principle (informally, aim for the best):

choose the strategy that can give you the best outcome.

In this case, maximax says choose s2.

outcome,

so maximax can mean aim for the best --- but get the worst.

For each strategy, determine the worst outcome (minimum

payoff) you could possibly get if you select that strategy;

this is called the security level for each strategy.

In this case ,

the security level of s1 is 2, while

the security level of s2 is 1.

Then choose the strategy that gives you the highest security

level,

i.e., the maximum of the minimums or maximin.

guarantee a payoff of at least 2, regardless of what Nature

does.

Maximax

vs.

Maximin

For reasons that

will be made

evident later,

the term

minimax is

used more

commonly than

maximin.

Reason

maximize the average payoff):

choose the strategy the gives you the highest average payof

(averaged across contingencies).

In this case, s1 and s2 have the same average value (2.5).

It assumes that the payoffs are cardinal [or interval], whereas

the payoffs displayed in the matrix above are probably just

ordinal.

It also in effect assumes that all contingencies are equally

probable.

made

by an objective and known (to the player) random mechanism

(e.g., at a Las Vegas gaming table);

This is called decision making under (objective) risk;

or by some process concerning which the player has subjective

probability estimates (e.g., whether it will rain or shine);

This is called decision making under (subjective) uncertainty.

In either event, it is unlikely that all of natures contingencies are

equally probable.

Maximization

The payoff matrix has been modified to show cardinal (or interval),

rather than merely ordinal, payoffs.

Choose the strategy that gives you the highest expected payofs,

weighting each contingency by its (objective or subjective) probability.

This requires that

payoffs are cardinal (or interval) in nature and

the decision maker knows the probability over natures

contingencies .

Given p = p = .5, the expected payoff from s1 = 6 and from s2 is

5, so P1 should choose S1.

If p = .25 and p = .75, the expected payoff from s1 is 7 and from

s2 is 7.5, so P1 should choose s2.

1

(cont.)

If rain is certain, P1 definitely should take his umbrella

If shine is certain, P1 definitely should not take his umbrella

How probable does rain have to be so that P1 (if he is

maximizing expected payoffs) should choose to take his

umbrella?

between his two strategies (because they have the same expected

payoffs)?

shine is (1-p).

4p + 8(1-p) = 0p + 10(1-p)

6p = 2

p = 1/3

(and p = 2/3)

In which case the expected payoff from s1 = 4/3 + 16/3 = 20/3 = 7.333 ,

The expected payoff from s2 = 0/3 = 20/3 = 7.333

D-Day June 5 was postponed due to a storm in the channel and

another storm was predicted to arrive shortly after the first.

RAF Meteorologist James Martin Stagg predicted there would be a

brief window on June 6 with a break in weather.

Eisenhower: OK lets go.

Marginal weather predicted for June 6 may have been

advantageous in terms the (Zero-Sum) Game Against the Germans

(as opposed to the Game Against Nature).

To invade only with favorable tides and full moon entailed

disadvantages in terms of the Game Again the Germans but

evidently more than compensating advantages in terms of the

Game Against Nature.

The Game Against the Germans was, in this respect, strictly

determined (as defined in Topic #5).

(cont.)

(cont.)

Cardinal Payoffs $$

equivalent to money, but not always.

Consider a game with two players plus Nature:

P1 is you, deciding whether to buy home-owners (fire) insurance;

P2 is an insurance company, deciding whether to sell you a policy;

Nature decides whether your home will burn down in the next year.

If you and the insurance company have the same beliefs about the

probability that your house will burn down in the year, is there a

premium price such that you will buy and they will sell

Not if payoffs = expected $$$.

You probably are not risk-neutral but rather risk-averse.

But the insurance company, insuring millions of widely dispersed house,

can afford to be risk neutral.

Ditto in a game between you, a Las Vegas gaming house, and Nature.

If you win the state lottery, are you indifferent between these two

prizes?

Prize 1: $1,000,000

Prize 2: Another lottery ticket, which gives you a .5 chance of winning

$2,000,000 and a .5 chance of winning $0.

Practice

Practice

decision principle lurking in this example?

If strategy A gives you at least as good a payoff in

every contingency as strategy B and a better

outcome in at least one contingency,

do not choose strategy B (as it is dominated by strategy A);

choose an undominated strategy instead.

s3, so P1 should not choose s1 or s3.

Put otherwise, S2 is at least as good a reply as s1

(or s3) in every contingency and is a better reply in

at least one contingency.

(cont.)

if strategy A dominates strategy B, dont use strategy B.

if strategy A dominates strategy B, use strategy A, because

there may be some strategy C that dominates A, or more likely

there may be some strategy D that is undominated and which gives

a larger payoff than A in some contingency.

that is, each is a best reply in some contingency.

(cont.)

dominates s4 (as well as s1 and s3),

so s2 is a dominant strategy.

contingency.

Corollary of Dominance Principle: If you have a

dominant strategy, use it.

Notice that the Dominance Principle does not

require cardinal payoffs in order for it to be applied, and

does not depend on the probabilities of the contingencies.

The Dominance Principle is consistent with every

decision principle discussed earlier.

If s1 dominates s2,

S2 cannot be uniquely minimax

S2 cannot have a higher average payoff

S2 cannot have a higher expected payoff.

undominated strategies and

only rarely do players have dominant strategies.

good advice where it applies, it very often does

not apply.

The Dominance Principle appears to be a good

principle to follow, not only in Games Against

Nature, but also in Games Against Other Players.

This is not true of the other Decision Principles.

But notice that RIGHT dominates LEFT in the Social

Dilemma Game (and compare with the Prisoners Dilemma

Game in Topic #4).

one tragic):

Following another car into an almost full parking garage.

Passengers on United #93.

A threat to use a dominant strategy is highly credible (as

will be discussed in Section II of the course).

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