Game Theory and its Applications

Game Theory and its Applications

(BITS F314)

Paras Sachdeva

Department of Economics and Finance

BITS Pilani, Pilani Campus

www.parassachdevaeco.com

Paras Sachdeva BITS Pilani, Pilani Campus Game Theory and its Applications (F314)
 Game Theory and its Applications

Extensive Games with Imperfect Information

An extensive form game with perfect information

Γ = N, (Ai )i∈N , H, P, (Ii )i∈N , (ui )i∈N where
N = {1, 2, . . . , n} is a finite set of players
Ai for i = 1, 2, . . . , n is the set of actions available to player i (action
set of player i)
H is the set of all terminal histories.
P : SH → N is a player function that associates each proper
subhistory to a certain player
SH : set of all proper sub histories
Ii for i = 1, 2, . . . , n is the set of all information sets of player i
ui : H → R for i = 1, 2, . . . , n gives the utility of player i
corresponding to each terminal history.

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Extensive Games with Imperfect Information

A specification of each player’s information about the history at every

point at which the player moves.

Let Hi be the set of histories after which player i moves.

We specify the player’s information by partitioning (dividing up) Hi

into a collection of information sets.

This collection is called player i’s information partition.

When making her decision, player i is informed of the information set

that has occurred but not of which history within that set has
occurred.

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 Game Theory and its Applications

Extensive Games with Imperfect Information

Hi = {C , D, E }

Player is informed only that the history is C, or that it is either D or E.

Then player i’s information partition consists of two information sets:

{C } and {D, E }

If she is not informed at all about which history has occurred, then her
information partition consists of a single information set, {C , D, E },

if she is informed precisely about the history, then her information

partition consists of three information sets, {C }, {D}, and {E }.

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Extensive Games with Imperfect Information

A(h) be the set of actions available after history h.
′
We allow two histories h and h to be in the same information set
′
only if A(h) = A(h )

The player who moves after any history must know the set of actions
available after that history.
′ ′
if h and h are in the same information set and A(h) ̸= A(h ), then the
player who moves at this information set can deduce which of these
two history had occurred by looking at the actions available to her.

If the information set that contains h and h′ is Ii , the common value

of A(h) and A (h′ ) is denoted A (Ii ). That is, A (Ii ) is the set actions
available to player i at her information set Ii .

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 Game Theory and its Applications

Extensive Games with Imperfect Information

An extensive game (with imperfect information and chance moves)
consists of
a set of players
a set of sequences (terminal histories) having the property that no
sequence is a proper subhistory of any other sequence
a function (the player function) that assigns either a player or
”chance” to every sequence that is a proper subhistory of some
terminal history
a function that assigns to each history that the player function assigns
to chance a probability distribution over the actions available after
that history, with the property that each such probability distribution
is independent of every other distribution
for each player, a partition (the player’s information partition) of the
set of histories assigned to that player by the player function
for each player, preferences over the set of lotteries over terminal
histories.
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 Game Theory and its Applications

Extensive Games with Imperfect Information

An extensive game with imperfect information is defined as:

Γ = ⟨N, H, P, fc , (Ii ) , (≿i )⟩ .

A set N={1,2, . . . , n} of players.

A set H of histories.
A function P : H\H → N ∪ {c} that assigns to each non-terminal
history a member of N ∪ {c}. P is called the player function, and
P(h) is the player who takes an action after the history h.
If P(h)=c
then chance determines the action taken after the history h .
After any non-terminal history h player P(h) chooses an action from

A(h) = {a : (h, a) ∈ H}.

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Extensive Games with Imperfect Information

A function fc that associates with every history h for which P(h) = c

a probability measure fc (· | h) on A(h), where each such probability
measure is independent of every other such measure.
For each player i ∈ N a partition Ii of {h ∈ H : P(h) = i} with the
property that A(h) = A (h′ ) whenever h and h′ are in the same
member of the partition.
For Ii ∈ Ii we denote by A (Ii ) the set A(h) and by P (Ii ) the player
P(h) for any h ∈ Ii .
Ii is the information partition of player i; a set Ii ∈ Ii is an
information set of player i.
The information set containing the history h is denoted by I (h).

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 Game Theory and its Applications

Extensive Games with Imperfect Information

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 Game Theory and its Applications

Extensive Games with Imperfect Information

Players The two people, say 1 and 2.

Terminal histories (B, B), (B, S), (S, B), and (S, S).
Player function P(∅) = 1, P(B) = P(S) = 2.
Chance moves None.
Information partitions Player 1’s information partition contains a
single information set, ∅ (player 1 has a single move, and when
moving she is informed that the game is beginning)
player 2’s information partition also contains a single information set,
{B, S} (player 2 has a single move, and when moving, she is not
informed whether the history is B or S ).

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Extensive Games with Imperfect Information

(Card game) Each of two players begins by putting a dollar in the
pot.’
Player 1 is then dealt a card that is equally likely to be High or Low;
she observes her card, but player 2 does not.
Player 1 may see or raise. If she sees, she shows her card to player 2
If player 1’s card is High she takes the money in the pot, and if it is
Low player 2 takes the money in the pot; in both cases the game ends.
If player 1 raises, she adds a dollar to the pot and player 2 chooses
whether to pass or meet.
If player 2 passes, player 1 takes the money in the pot.
If player 2 meets, she adds a dollar to the pot, and player 1 shows her
card.
If the card is High, player 1 takes the money in the pot. while if it is
Low player 2 does so.
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Extensive Games with Imperfect Information

Player 1 has two information sets, one containing the single history
High and one containing the single history Low.
Player 2 has one information set, consisting of the two histories
(High, Raise) and (Low, Raise).
This information set reflects the fact that player 2 cannot observe
player 1’s card.

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Extensive Games with Imperfect Information

Each player has a single information set: the challenger’s information

set consists of the empty history,
the incumbent’s information set consists of the two histories Ready
(the challenger enters, prepared for combat) and Unready (the
challenger enters without having made preparations).

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 Game Theory and its Applications

Extensive Games with Imperfect Information

Each player has a single information set: the challenger’s information

set consists of the empty history,
the incumbent’s information set consists of the two histories Ready
(the challenger enters, prepared for combat) and Unready (the
challenger enters without having made preparations).

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 Game Theory and its Applications

Extensive Games with Imperfect Information

A (pure) strategy of player i in an extensive game is a function that

assigns to each of i ’s information sets Ii an action in A (Ii ) (the set
of actions available to player i at the information set Ii ).

A mixed strategy of a player in an extensive game is a probability

distribution over the player’s pure strategies.

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 Game Theory and its Applications

Extensive Games with Imperfect Information

Pass Meet
Raise, Raise 1, −1 0,0
1 1
Raise, See 0,0 2, −2
See, Raise 1, −1 − 12 , 21
See, See 0,0 0,0

Acquiesce Fight
Ready 3,3 1,1
Unready 4,3 0,2
Out 2,4 2,4

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Extensive Games with Imperfect Information

The mixed strategy profile α∗ in an extensive game is a (mixed

strategy) Nash equilibrium if, for each player i and every mixed
strategy αi of player i, player i ’s expected ∗
∗

payoff to α is at least as
large as her expected payoff to αi , α−i according to a payoff
function whose expected value represents player i’s preferences over
lotteries.

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Extensive Games with Imperfect Information

Belief and Sequential Equilibrium

We assume that at an information set that contains more than one
history, the player whose turn it is to move forms a belief about the
history that has occurred.

We model this belief as a probability distribution over the histories in

the information set. (At an information set containing a single history,
the only possible belief assigns probability equal to 1)

A belief system in an extensive game is a function that assigns to

each information set a probability distribution over the histories in
that information set.

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Extensive Games with Imperfect Information

Behavioral Strategy
A behavioral strategy of player i in an extensive game is a function
that assigns to each of i ’s information sets Ii a probability
distribution over the actions in A (Ii ), with the property that each
probability distribution is independent of every other distribution.

A behavioral strategy in which every probability distribution assigns

probability 1 to a single action is equivalent to a pure strategy.

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Extensive Games with Imperfect Information

Assesment
An assessment in an extensive game is a pair consisting of a profile
of behavioral strategies and a belief system.

An assessment is an equilibrium if it satisfies the following two

requirements

Sequential rationality Each player’s strategy is optimal whenever

she has to move, given her belief and the other players’ strategies.

Consistency of beliefs with strategies Each player’s belief is

consistent with the strategy profile.

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Extensive Games with Imperfect Information

Sequential rationality
Sequential rationality requires that each player’s strategy be optimal
in the part of the game that follows each of her information sets

given the strategy profile

given the player’s belief about the history in the information set that
has occurred,

regardless of whether the information set is reached if the players

follow their strategies.

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Extensive Games with Imperfect Information

Sequential rationality
Let (β, µ) be an assessment in an arbitrary game (i.e. let β be a
profile of behavioral strategies and µ a belief system),
let Ii be an information set of player i.
OIi (β, µ) the probability distribution over terminal histories that
results if each history in Ii occurs with the probability assigned to it
by i ’s belief µi (which is not necessarily the probability with which it
occurs if the players adhere to β ), and subsequently the players
adhere to the strategy profile β.
Sequential Rationality Requirement: for each player i and each of
her information sets Ii , her expected payoff to OIi (β, µ) is at least as
large as her expected payoff to OIi ((γi , β−i ) , µ) for each of her
behavioral strategies γi .

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Extensive Games with Imperfect Information

Consistency of Belief
In a steady state, each player’s belief must be correct: the probability
it assigns to any history must be the probability with which that
history occurs if the players adhere to their strategies.
The implementation of this idea is straightforward at an information
set reached with positive probability if the players follow their
strategies,
Unclear at an information set not reached if the players follow their
strategies.
Every history in such an information set has probability 0 if the players
follow their strategies, but if such an information set is reached, the
player who moves there must believe that some history has occurred.
We deal with this difficulty by allowing the player who moves at such
an information set to hold any belief at that information set.
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Extensive Games with Imperfect Information

Consistency of Belief
consistency requirement to restrict the belief system only at
information sets reached with positive probability if every player
adheres to her strategy.
probability assigned to every history h∗ in such an information set by
the belief of the player who moves there be equal to the probability
that h∗ occurs according to the strategy profile, conditional on the
information set’s being reached.
Denoting the information set by Ii and the strategy profile by β, by
Bayes’ rule this probability is

Pr (h∗ according to β)
P .
h∈Ii Pr(h according to β)

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Extensive Games with Imperfect Information

Consistency of Belief
Consider the card game. If player 1’s strategy selects See whether her
card is High or Low, the consistency condition does not restrict player
2’s belief, because player 2’s information set is not reached.
For every other strategy of player 1, the condition determines player
2’s belief. Denote the probability that player 1 chooses Raise if her
card is High by pH and the probability she chooses Raise if her card is
Low by pL .
Pr( High according to β) = pH and Pr( Low according to β) = pL , so
the consistency requirement is that player 2’s belief assign probability
pH / (pH + pL ) to the history H and probability pL / (pH + pL ) to the
history L.

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