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Game Theory Introduction

The document introduces the single-person decision problem, outlining its three main components: actions, outcomes, and preferences. It discusses key axioms of preference relations, including completeness and transitivity, and highlights the Condorcet Paradox, which illustrates potential group indecisiveness despite individual rationality. Additionally, it defines payoff functions and rational players, emphasizing that a rational player maximizes their payoff when making decisions.

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udaykaranwal13
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12 views9 pages

Game Theory Introduction

The document introduces the single-person decision problem, outlining its three main components: actions, outcomes, and preferences. It discusses key axioms of preference relations, including completeness and transitivity, and highlights the Condorcet Paradox, which illustrates potential group indecisiveness despite individual rationality. Additionally, it defines payoff functions and rational players, emphasizing that a rational player maximizes their payoff when making decisions.

Uploaded by

udaykaranwal13
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Preliminaries

Introduction: Single-Person Decision Problem

Lecture 1,
Jan 02, 2025
Preliminaries
Introduction

Actions, Outcomes, and Preferences

A decision problem consists of three features:


1 Actions are all the alternatives from which the player can
choose.
2 Outcomes are the possible consequences that can result from
any of the actions.
3 Preferences describe how the player ranks the set of possible
outcomes, from most desired to least desired. The preference
relation ≿ describes the player’s preferences, and the notation
x ≿ y means ”x is at least as good as y.”
Preliminaries
Introduction

The Completeness Axiom:

Strict preference relation, x ≻ y , for ”x is strictly better than


y”.
The indifference relation, x ∼ y , for ”x and y are equally
good”.
The Completeness Axiom: The preference relation ≿ is
complete, i.e., any two outcomes {x, y } ∈ X can be ranked by
the preference relation, so that either x ≿ y or y ≿ x.
Preliminaries
Introduction

The Transitivity Axiom:

The Transitivity Axiom: The preference relation ≿ is


transitive, i.e., any three outcomes {x, y , z} ∈ X , if x ≿ y and
y ≿ z then x ≿ z.
A preference relation that is complete and transitive is called a
rational preference relation.
Preliminaries
Introduction

Remark on Condorcet Paradox:

According to Marquis de Condorcet (1785), it is possible to


have a group of rational individual players who, when put
together to make decisions as a group, will become an
”irrational” group.
For example, imagine three roommates, called players 1, 2,
and 3, who have to choose between three IITs - Delhi,
Bombay and Kanpur.
Player 1’s preferences are given by D ≻1 B ≻1 K , player 2’s
are given by B ≻2 K ≻2 D, and player 3’s are given by
K ≻3 D ≻3 B.
Imagine that these three players make choices in a democratic
way and use majority voting to reach a decision.
Qs: What will be the preferences of the Group, ≻G ?
Preliminaries
Introduction

Remark on Condorcet Paradox:

Q: What will be the resulting preferences of the group (G),


≻G ?
These three rational players will not be able to reach a
conclusive decision using the group preferences that result
from majority voting!
This type of group indecisiveness resulting from majority
voting is often referred to as the Condorcet Paradox.
Just to keep in mind that imposing individual rationality does
not imply ”group rationality”.
Preliminaries
Introduction

Payoff Functions

Definition: A payoff function u : X → R represents the


preference relation ≿ if for any pair {x, y } ∈ X ,
u(x) ≥ u(y ) if and only if x ≿ y .
In word: we say that the preference relation ≿ is represented
by the payoff function u : X → R that assigns to each
outcome in X a real number, if and only if the function
assigns a higher value to higher-ranked outcomes.
Proposition: If the set of outcomes X is finite then any
rational preference relation over X can be represented by a
payoff function.
Proof:
Preliminaries
Introduction

The Rational Choice Paradigm

Rational Choice Assumptions:


The player fully understands the decision problem by knowing:

1 all possible actions, A;


2 all possible outcomes, X;
3 exactly how each action affects which outcome will materialize;
and,
4 his rational preferences (payoffs) over outcomes.
Preliminaries
Introduction

Rational Player

Payoffs are generally defined over actions.


Actions and outcomes are one-to-one correspondence.
Hence, even though preferences and payoff are defined over
outcomes, we can consider the preferences and payoffs to be
defined over actions.
We can define the payoff over actions as follows: if x(a) is the
outcome resulting from action a, then the payoff from action
a is given by v (a) = u(x(a)), the payoff from outcome x(a).
We will therefore use the notation v (a) to represent the payoff
from action a. Now we can precisely define a rational player
as follows:
Definition: A player facing a decision problem with a payoff
function v (.) over actions is rational if he chooses an action
a ∈ A that maximizes his payoff. That is,a∗ ∈ A is chosen if
and only if v (a∗ ) ≥ v (a) for all a ∈ A.

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