Game theory

• Analysis of the decision-making behavior of independent agents (‘players’)

whose decisions are interrelated.

• In decision theory, decision-making is analyzed in a non-interactive context

(agent vs. ‘nature’). In game theory, decisions are seen as the dynamic result
of agents’ interactions.

• However, both decision theory and game theory assume that agents act
according to certain rationality criteria (their decisions are not primarily the
result of psychological or sociological variables).
 Games
• Interactive situations involving rational agents with (partly)
conflicting interests and aims. Games are about strategic
interactions (if he chooses x then I will choose y, but then if I
choose y he will probably choose z…).

• Basic elements:
o Players (agents),
o strategies (decisions, sets of decisions),
o situations (combinations of strategies),
o benefits and
o preferences (how each player orders the utilities associated to each
possible result)
 Types of games
According to:
• Distribution of benefits:
o Zero-sum games: the overall benefit is constant, what one player loses the
other players win
o Nonconstant (or positive) sum games: players can win or lose at the same
time.
• Available information:
o Games with perfect/imperfect information: knowing the “moves” of the other
players (the game history)
o Games with complete/incomplete information: knowing the rules of the game
(the specific parameters of that interactive situation)
• Type of interaction:
o non-cooperative – players cannot coordinate their strategies
o cooperative (coallitions).
 Prisoners’ dilemma
• What is the relevance of the PD situation?
• Lack of trust, suspicion – suboptimal results
• Each prisoner can choose between an alternative with high
risk and the highest reward (to defect) and an alternative with
the highest risk and a high reward (to cooperate).

• What decision model to apply? What criteria?

Strategic interaction and bargaining
 Pareto optimum

• Ex: distributing arable land between farmers, or

slicing a birthday cake
• A distribution which makes one person better off
without making the others worse off is a Pareto
improvement
• A distribution which cannot make somebody better
off without making somebody else worse off
represents a Pareto optimum.

• Problems: fair distributions? Status quo?

 The Pareto principle
• ‘The vital few and the trivial many’

• Attributed to Vilfredo Pareto, it initially referred to the unbalanced income

distribution in 19th century Switzerland: 80% of the wealth was controlled
by roughly 20% of the population.

• Further empirical studies for other time periods, for other countries,
produced the stunning result that they all followed the same pattern. Later
analysis of distributions in industry and nature has demonstrated that 80/20
Pareto distributions were very common in various fields and not exclusive to
income distribution.
 Dominant strategy
• A strategy which offers maximum possible utility, no matter
what the others choose

If player A considers all alternative combinations of strategies

and, for each of them, selects the strategy which offers the
maximum benefit, and if this selected strategy is the same for all
possible combinations of strategies, then it represents the
dominant strategy of player A.

See prisoners’ dilemma, chicken game, freerider’s problem

 Nash equilibrium
• Used in the analysis of strategic interactions between several
players which take decisions simultaneously

• If there is a set of strategies with the property that no player

can obtain a benefit by unilaterally changing his strategy, then
it represents a Nash equilibrium point.

• A Nash equilibrium is the result of a game in which player A

chooses the optimum strategy given the strategy chosen by B,
and B chooses the optimum strategy given the strategy chosen
by A.
 Nash equilibrium

• It does not necessarily represent the best

cumulative payoff for all players; some other
mutual arrangement might improve their
benefits (ex. forming a cartel)
 Prisoner’s dilemma

(benefits, not years in prison) Henry

Cooperate Defect

Dave Cooperate 3, 3 1, 5

Defect 5, 1 2, 2

NE: Identifying dominant strategies of each player, then identifying

intersection points of dominant strategies.
NE does not represent the global optimal strategy.
 Coordination

P2

DVD Bluray

P1 DVD 4, 4 3, 1

Bluray 1, 3 3, 3

Multiple Nash equilibria

 Identifying Nash equilibrium
points (informal rule)
• if the first payoff number is the maximum of the column of
the cell and if the second number is the maximum of the row
of the cell - then the cell represents a Nash equilibrium.
 Nash equilibrium

Price competition

Borsec

Price=1 Price=2

Dorna Price=1 0,0 5000, -5000

Price=2 -5000, 5000 0,0

 Multiple Nash equilibria: Chicken

Buzz

Jump Drive on
Jim Jump Life, life Chicken, hero
Drive on Hero, chicken Death, death

(ordering: hero – life – chicken - death)

Is there an optimum equilibrium? Problems of coordination.

• In this context, a player either wins or loses; there is no possibility of
making an agreement to obtain higher benefits collectively; they seem to be
locked in a conflict, and the only ways out are considered disadvantageous
(life or chicken).

• The highest benefits are associated with the highest risks (just as in real life).
As each player has an incentive to unilaterally change his strategy and adopt
the high reward/ high risk option, they can both end up in the worst
situation.

• Application to real life situations. How would you play the chicken game?
 The freerider’s dilemma

P2

Contribution No contribution

P1 Contribution 4, 4 4, 6

No contribution 6, 4 0, 0

Each participant knows that the individual utility depends on the number
of those who choose to contribute. Is this a strong enough motivation to
contribute yourself?
 The ultimatum game
Two players interact to decide how to divide a sum of money that
is given to them. The first player proposes how to divide the sum
between themselves, and the second player can either accept or
reject this proposal. If the second player rejects, neither player
receives anything. If the second player accepts, the money is split
according to the proposal. The game is played only once.
 Payoff table 1

Total quantity Q P2

Accept Reject

P1 Offers a x% share 10, 2 0, 0

of Q to P2

Distributes all Q 12, 0 0, 0

to himself
 Payoff table 2

Total quantity Q P2

Accept Reject

P1 Offers a x% share Deal, deal No deal, no deal

of Q to P2

Distributes all Q Deal, no deal No deal, no deal

to himself

Unrealistic, not a feasible NE point.

 The ultimatum game

• Suppose that the first demands a large amount that

gives the second some (small) amount of money. By
rejecting the demand, the second is choosing nothing
rather than something. So, it would be better for the
second to choose to accept any demand that gives her
any amount whatsoever. If the first knows this, he will
give the second the smallest (non-zero) amount
possible.
 The ultimatum game
• The classical explanation of the ultimatum game as a well-formed experiment approximating
general behaviour often leads to a conclusion that the traditional model of economic self-
interest is incomplete. However, several competing models suggest ways to bring the cultural
preferences of the players within the optimized utility function of the players in such a way
as to preserve the utility maximizing agent as a feature of microeconomics.

• For example, researchers have found that Mongolian proposers tend to offer even splits
despite knowing that very unequal splits are almost always accepted. Similar results from
other small-scale societies players have led some researchers to conclude that "reputation" is
seen as more important than any economic reward.

• Another way of integrating the conclusion with utility maximization is some form of inequity
aversion model (preference for fairness). Even in anonymous one-shot setting, the economic-
theory suggested outcome of minimum money transfer and acceptance is rejected by over
80% of the players.
 Conditions
If a game has a unique Nash equilibrium and is played among players under certain
conditions, then the NE strategy set will be adopted. Sufficient conditions to guarantee
that the Nash equilibrium is played are:

1. The players all will do their utmost to maximize their expected payoff as described by the
game.
– The players are flawless in execution.
– The players have sufficient intelligence to deduce the solution.
– The players know the planned equilibrium strategy of all of the other players.
– The players believe that a deviation in their own strategy will not cause deviations by any
other players.
– There is common knowledge that all players meet these conditions, including this one. So,
not only must each player know the other players meet the conditions, but also they must
know that they all know that they meet them, and know that they know that they know that
they meet them, and so on.
 Cuban missile crisis
• The Cuban Missile Crisis was a confrontation between the United
States, the Soviet Union, and Cuba in the early 1960s during the Cold
War.

• In late 1961, Kennedy engaged Operation Mongoose, a series of

covert operations against Castro's government. They were
unsuccessful. More overtly, in February 1962, the United States
launched an economic embargo against Cuba.

• The United States also considered covert action. Air Force General
Curtis LeMay presented to Kennedy a pre-invasion bombing plan in
September, while spy flights and minor military harassment from the
United States Guantanamo Naval Base were the subject of continual
Cuban diplomatic complaints to the U.S. government.
 Cuban missile crisis

As a consequence, Castro and Soviet premier Nikita Khrushchev

agreed to secretly place strategic nuclear missiles in Cuba. Like
Castro, Khrushchev felt that a U.S. invasion of Cuba was imminent,
and that to lose Cuba would do great harm to his prestige worldwide,
especially in Latin America. He said that he wanted to confront the
Americans "with more than words...the logical answer was missiles.“ 
 
The tensions were at their height from October 8, 1962. On October
14, United States reconnaissance saw the missile bases being built in
Cuba.
 Cuban missile crisis

The first consignment of SS-3 MRBMs (medium range ballistic missiles) arrived
on the night of September 8, followed by a second on September 16. The Soviets
were building nine sites — six for SS-4s and three for SS-5s with a
4,000 kilometer-range (2,400 statute miles). The planned arsenal was forty
launchers, a 70% increase in first strike capacity. 
 
Kennedy saw the photographs on October 16; he assembled the Executive
Committee of the National Security Council (EXCOMM). The U.S. had no plan for
dealing with such a threat, because U.S. intelligence was convinced that the
Soviets would not install nuclear missiles in Cuba. The EXCOMM quickly
discussed five courses of action:
1. Do nothing.
– Use diplomatic pressure to get the Soviet Union to remove the missiles.
– An air attack on the missiles.
– A full military invasion.
– The naval blockade of Cuba, which was redefined as a more restrictive
quarantine.
 Cuban missile crisis

Soviet Union

Retreat (W) Maintenance (M)

USA Naval Compromise SU victory, USA defeat

blockade (3,3)
(B) (2,4)

Air strike USA victory, Nuclear war

(A) SU defeat (0,0)
(4,2)

What type of game? What are the pros and cons for each
alternative?
• Kennedy: “It shall be the policy of this nation to regard any nuclear missile
launched from Cuba against any nation in the Western Hemisphere as an
attack on the United States, requiring a full retaliatory response upon the
Soviet Union.”

• End of the crisis: Hrusciov finally agreed to withdraw the missiles from
Cuba and sign an agreement of non aggression, while Kennedy offered
guarantees regarding the non-intervention in Cuba. After much deliberation
between the Soviet Union and Kennedy's cabinet, Kennedy agreed to
remove all missiles set in Turkey on the border of the Soviet Union.

• Do we have winners and losers?

The practical effect of this Kennedy-Khrushchev Pact was that it effectively
strengthened Castro's position in Cuba in that he would not be invaded by the
United States.

It is possible that Khrushchev only placed the missiles in Cuba to get Kennedy
to remove the missiles from Turkey and that the Soviets had no intention of
resorting to nuclear war if they were out-gunned by the Americans.

However, because the withdrawals from Turkey were not made public at the
time, Khrushchev appeared to have lost the conflict and become weakened. The
perception was that Kennedy had won the contest between the superpowers and
Khrushchev had been humiliated.
 Case study

• Referendum on the reform of the electoral system: the

electorate has to choose between:
o 1. switching to a majoritarian system with single
constituencies (first-past-the-post)
o 2. adopting a mixed system, with some mandates being
allocated in single constituencies and others being
redistributed at national level, according to party lists
o 3. going on with the same system (proportional
representation with party lists)
• The two main competing parties, A and B, have to express an
official position. This will certainly influence their future
results in parliamentary elections.
• Polls show that the percentages of those supporting each
option are 50 (1), 20 (2) and 30 (3).
• If A and B will support the same option, electors supporting
that option will be split equally between A and B; if they
support different options, each party will obtain the votes of
electors who prefer that option.
    B

    Majoritarian Mixed Proportional

A Majoritarian 25,25 50,20 50,30

Mixed 20,50 10,10 20,30

Proportional 30,50 30,20 15,15

Nash equilibrium? How many?

• Problems of coordination: which NE point will be chosen?
What happens if one party tries to 'push' the selection of its
preferred NE point?
• Overall, the difference between the two NE points is
irrelevant because:
o the total estimated benefit is the same (80),
o both equilibriums are efficient, meaning that there is no
possible higher value.
 

If both parties try to 'force' the selection of their preferred NE, they
wll end up in the {Ma, Ma} option, which is clearly suboptimal.
 
Moreover, if each party assumes that the other will choose Ma and
will consequently choose Pr, they will get {Pr, Pr}, even worse than
the first one. It seems there is no possibility for the two parties to
coordinate their strategies in order to avoid suboptimal results.
Case study: euthanasia

• Etimology – “good death"

• it refers to a deliberate action to take somebody's life out of compasion or in order to carry out his will,
usually in a painless manner
•  
•  
• how to decide if euthanasia is socially acceptable or not?
Euthanasia

First of all, we should distinguish between different forms of

euthanasia:

• voluntary: carried out by A at the request of B, on B's behalf - close

to assisted suicide
• non-voluntary:ending the life of a person who cannot decide for
herself, but who might be presumed to have chosen the same (or
who is in an intolerable situation, so that ending it is seen as a
humanitarian act)
• involuntary: ending a life of a person without her consent, although
theoretically she was capable of making a choice on her own; the
most problematic, since it assumes that another person may be in a
better position to judge whether certain conditions are sufficient
and necessary in order to take somebody's life for his own good
Euthanasia

Another important distinction: passive vs. active

euthanasia       
Passive: voluntary omission, non-intervention in a
course of events which will lead to somebody's death
Active: voluntary action, initiation of a course of events
which will directly lead to somebody's death
Are there differences in terms of the moral and legal
responsability involved?
 
'To make it happen' vs. ' to let it happen'.
Ex: mother feeding the newly-born, insuline to a
diabetics patient.
Euthanasia

How far can we go on maintaining an incurable sick person on medical

apparatuses, just to maintain his basic vital functions? Where do we
have to draw the line between acceptable and unacceptable omissions?
   
Differences between different forms of intervention or omission: ex.
feeding vs. complicated surgery with great risks
 
There is no failproof decision model to apply here, as there is no magic
formula to apply mechanically to most life situations. They require
good judgement (discernamant), which is a combination of logic and
reasoning skills, experience, common sense, as well as the capacity to
distinguish the relevant from the irrelevant.
Euthanasia

As of 2009, some forms of euthanasia are legal in Belgium,

Luxembourg, The Netherlands, Switzerland, the U.S. states of
Oregon and Washington the Autonomous Community of
Andalusia (Spain), and Thailand.
Euthanasia

Voluntary: Does a person have a right of life and death on

herself, even in situations where she does not have the ability
to end her own life? Right of self-determination.
 
Non-voluntary:  Can it be justified to end one's life without his
consent, because the situation is intolerable or just too
degrading?

Involuntary: Is it justified to end one's life because you can

presume that you have a better perspective on his own
situation and therefore are in a position to choose in his place?

Moral problems vs. factual problems.

Euthanasia

Prior to and during World War II, Nazi Germany conducted a

euphemistically named "euthanasia program", code-named Action T4.
This program was based on eugenics and grounded in the view that the
state is responsible for providing racial hygiene.

"Of course, I had always known that the use of the term 'euthanasia' by
the Nazi killers was a euphemism to camouflage their murder of human
beings they had designated as 'life unworthy of life'; that their aim was
not to shorten the lives of persons with painful terminal diseases but to
kill human beings they considered inferior, who could otherwise have
lived for many years."
The Origins of Nazi Genocide: From Euthanasia to the Final Solution,
Henry Friedlander, UNC Press, 1997
Euthanasia

Kant is known for his theory that there is a single moral

obligation, which he called the "Categorical Imperative", and is
derived from the concept of duty. Kant defines the demands of
the moral law as "categorical imperatives." Categorical
imperatives are principles that are intrinsically valid; they are
good in and of themselves; they must be obeyed in all
situations and circumstances if our behavior is to observe the
moral law.
 
 "Act only according to that maxim whereby you can at the
same time will that it should become a universal law."
 
What happens if we apply it to voluntary, non-voluntary and
involuntary euthanasia?