Games for Modeling Human Behaviour

(II)
Decisions versus Strategies
 ―No man is an island‖ – interdependence

 What is my ―guess‖ about your ―choices‖?

 Given that, what are my options, responses?
 What would be the outcome of such interaction?
 What if we interact more than once?
 What if my initial ―guess‖ was not fully correct?

 The classic husband-wife story

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Decisions versus Strategies
 What one does must affect the outcome of the others.

 Mutual awareness of this cross-effect turns mere interactions to

strategic games.

 Strategic games: interactions between mutually aware players (so at

least two player is required)
 Decisions: action situations where each person can choose without
concern for reaction or response from others (it can be a solo act)

 Strategic games arise most prominently in head-to-head confrontations

of two participants while interactions among a large number of
participants seem less susceptible to the issues raised by mutual
awareness
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Commitment
 Many situations that start out as impersonal markets with thousands of
participants turn into strategic interactions of two or just a few.

 This happens for one of two broad classes of reasons—mutual

commitments or private information.

 Commitment:

 You are contemplating building a house, you can choose one of several
dozen contractors in your area; the contractor can similarly choose
from several potential customers.
 There appears to be an impersonal market.

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Commitment (Continued)
 Once each side has made a choice, however, the customer pays an
initial installment, and the builder buys some materials for the plan of
this particular house.

 The two become tied to each other, separately from the market. Their
relationship becomes bilateral.

 The builder can try to get away with a somewhat sloppy job or can
procrastinate, and the client can try to delay payment of the next
installment.

 Strategy enters the picture.

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Commitment (Continued)
 Their initial contract in the market has to anticipate their individual
incentives in the game to come and specify a schedule of installments
of payments that are tied to successive steps in the completion of the
project.

 Even then, some adjustments have to be made after the fact, and these
adjustments bring in new elements of strategy.

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Private information
 Thousands of farmers seek to borrow money for their initial expenditures on
machinery, seed, fertilizer, and so forth, and hundreds of banks exist to lend
to them.

 Yet the market for such loans is not impersonal.

 A borrower with good farming skills who puts in a lot of effort will be more
likely to be successful and will repay the loan; a less-skilled or lazy borrower
may fail at farming and default on the loan.

 The risk of default is highly personalized. It is not a vague entity called ―the
market‖ that defaults, but individual borrowers who do so.

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Private information
 Therefore each bank will have to view its lending relation with each
individual borrower as a separate game.

 It will seek collateral from each borrower or will investigate each borrower’s
creditworthiness.

 The farmer will look for ways to convince the bank of his quality as a
borrower; the bank will look for effective ways to ascertain the truth of the
farmer’s claims.

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Private information (Continued)
 An insurance company will make some efforts to determine the health of
individual applicants and will check for any evidence of arson when a claim
for a fire is made.

 An employer will inquire into the qualifications of individual employees and

monitor their performance. (What if monitoring not possible?)

 More generally, when participants in a transaction possess some private

information bearing on the outcome, each bilateral deal becomes a game of
strategy, even though the larger picture may have thousands of very similar
deals going on.

 Adverse Selection (Lemon problem), Signalling

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Game Theory - redefined
 Formal way to analyze interaction among a group of rational agents who
behave strategically.

 Group, player, interaction, strategic, rationality (layers of, bounded)

 Focus : Interaction, Rational Agents, Strategy.

 Questions:
1. What (guess, action, outcome)
2. when (simultaneous, sequential, repeated) and
3. how (strategy, nature)?

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Classification of Games
 Sequential or Simultaneous?

 Simultaneous: PD Game
 Sequential: Chess
 In most actual games there is an aspect of both (R&D)

 The distinction between sequential and simultaneous moves is

important because the two types of games require different types of
interactive thinking.

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Classification of Games
 In a sequential-move game, each player must think: If I do this, how
will my opponent react? Your current move is governed by your
calculation of its future consequences.

 With simultaneous moves, you have the trickier task of trying to figure
out what your opponent is going to do right now.

 But you must recognize that, in making his own calculation, your
opponent is also trying to figure out your current move, while at the
same time recognizing that you are doing the same with him. . . .

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Classification of Games
 Total conflict or some commonality?

 Conflict: One player’s gain is the other’s loss. Similarly, in gambling

games, one player’s winnings are the others’ losses, so the total is 0.
This is why such situations are called zero-sum games. Also called
constant-sum games (dividing a land, property, prize etc…)

 Win-win games or non zero-sum games: Trade, joint ventures

etc.. where both benefit

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Classification of Games
 One-shot or repeated?

 One-shot: game played without worrying about its repercussions

on other games you might play in the future against the same person
or against others who might hear of your actions in this one.

 Each player doesn’t know much about the others; for example,
what their capabilities and priorities are, whether they are good at
calculating their best strategies or have any weaknesses that can be
exploited, and so on.

 Therefore in one-shot games, secrecy or surprise is likely to be an

important component of good strategy.
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Classification of Games
 Repeated: require the opposite considerations.

 You have an opportunity to build a reputation (for toughness,

fairness, honesty, reliability, and so forth, depending on the
circumstances) and to find out more about your opponent.

 The players together can better exploit mutually beneficial

prospects by arranging to divide the spoils over time (taking turns to
―win‖) or to punish a cheater in future plays (an eye for an eye or tit-
for-tat).

 More generally, a game may be zero-sum in the short run but have
scope for mutual benefit in the long run.
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Classification of Games
 Extent of information?

 External uncertainty, Strategic uncertainty

 Perfect, imperfect information

 Incomplete or Asymmetric information

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Classification of Games
 Rules of the Game – fixed or manipulable?

 In the home, parents constantly try to make the rules, and children
constantly look for ways to manipulate or circumvent those rules.
 In legislatures, rules for the progress of a bill (including the order in which
amendments and main motions are voted on) are fixed, but the game that
sets the agenda—which amendments are brought to a vote first—can be
manipulated.

 In such situations, the real game is the ―pregame‖ where rules are made,
and your strategic skill must be deployed at that point. The actual playing out
of the subsequent game can be more mechanical; you could even delegate it
to someone else.

 Threats, promises and credibility

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Classification of Games
 Are Agreements to Cooperate Enforceable?

 Cooperative and non-cooperative games.

 The important distinction is that in so-called non-cooperative games,

cooperation will emerge only if it is in the participants’ separate and
individual interests to continue to take the prescribed actions.

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Terminologies
 Strategy

 Pay-off

 Rationality

 Common Knowledge

 Equilibrium (Path)

 Dynamics and Evolutionary Games

 Observation and Experiment

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Reference
1. Games of Strategy (3rd Edition) by Avinash Dixit, Susan Skeath and
David H. Riley Jr.;Viva-Norton [Chapter 2].

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