GAME THEORY

The Idea: If two or more actors (people, firms, states, organizations, etc)
interact we can only predict the outcome of this interaction if we know:
(1) which actors are involved
(2) what actions each actor can take

(3) actors preferences over possible outcomes of the interaction

Undefined (primitive) terms that correspond to the three points are: players,
players actions/strategies and players payoffs.

Game Theory Basics

EXAMPLE
John and Tom exchange a quick message in passing: lets meet in front of
the library at noon. The problem is that there are two libraries on campus,
call them McKeldin (McK) and Hornbake (H), and both are equally likely
choices for John and Tom. There is no way for them to contact each other
before the they meet. Each has to take an action not knowing what the other
is going to do.
Actors: John and Tom
Actions (of each): John can choose to go to McK or H,
Tom can choose to go to McK or H.
All possible outcomes:

John goes to McK and Tom to McK,

John goes to McK and Tom to H,
John goes to H and Tom to McK,
John goes to H and Tom to H.

Game Theory Basics

EXAMPLE (cont.)
Payoffs: Assume that John and Tom only care if they meet or not. More
specifically, they both prefer to meet than not to meet and they are
indifferent between meeting at McK or H. In game theory (ordinal) payoffs
are defined as numbers assigned to possible outcomes that reflect players
preferences in the following way:
(1) if a player prefers outcome A over outcome B, a number assigned to A is
larger than the number assigned to B;
(2) if a player is indifferent between A and B, a number assigned to A is the
same as the number assigned to B.
To start with game theory we thus need one of the two rationality concepts
we have talked about: preference theory or expected utility theory. In the
first case the numbers are used in the ordinal sense (ordinal utility), in the
second, in the interval sense (cardinal utility.) In our example all we need is
ordinal utility. Remember, in game theory:

PAYOFFS = UTILITIES
Game Theory Basics

Tom chooses
to go to:
McK

Payoffs for Tom (Column)

McK

McK
McK

They meet
at McK

They do
not meet

John chooses
to go to:

They do
not meet

They meet
at H
McK

McK

McK
1

McK
Payoffs for
John (Row)

0
0

H
0

H
0

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THE MEANING OF PAYOFFS

Payoffs here are ordinal. The only significant property of the numbers
used for payoffs are order and equality. Thus, for example, the following
three games are all identical:
McK

McK
0

McK

McK
-3

McK
1

0
0

4
-3

6.34
9

H
0

-5.67

-7.11

McK

-7.11
H

-5.67
6.34

Given that all three games are the same which one do you think would be
normally used as a model of the situation described in the example? The
simples one, of course.
Game Theory Basics

Prisoners Dilemma
The most famous and the most important game of all

D
2

0
0

D
3

The game was first noted by Merrill Flood and Melvin Dresher of RAND in
1950. The name and the story behind it was given by Albert Tucker of
Princeton who was John Nashs advisor and friend.

Game Theory Basics

Two suspects are arrested by police. The DA does not have sufficient
evidence to convict them, if the case goes to trial, but he is positive that the
two have committed the crime. DA gives them the following deal: if one of
them confesses and turns in the evidence and the other one does not, the first
will go free and the second will go to jail for 5 years; if they both confess,
they will both serve 3 years; if none of them confesses, they will both serve 1
year for a minor charge.
C
D
1 yr

free

C
1 yr
5 yrs

5 yrs
3 yrs

D
free

3 yrs

where C stands for cooperate with your partner and remain silent and D
stands for defect and confess.
Game Theory Basics

So, do we have a game?

Can we, without any doubt, say that the matrix of outcomes (left) has to
correspond to the game matrix (right)?
C
1 yr

free

D
2

C
1 yr
5 yrs

5 yrs

3 yrs

0
0

D
free

3 yrs

Recall: 3 stands for the most preferred, 2 for the second best, 1 for the third best and 0 for the worst
outcome.

Of course, not. Players may have preferences as depicted by the game on the
right, but they may also have preferences that are very, very different.

Game Theory Basics

An interesting example of some very different preferences.

In 1976 Swedish Social Democrats, which is Swedish political left, lost their
first parliamentary election in half a century. Sweden, you should know, has
a very strong welfare state with very high taxes and very generous social
services. One of the issues in the 1976 campaign that sunk Social Democrats
was a crime wave that was induced by the lavish state of Swedish prisons
Btw. recall Anders Breivik of July 2011 mass killing in Oslo and Utoeya
Island ? Check out where he is going to do his time (youtube: Worlds Nicest
Prison: Halden Prison, Norway.)

So, how would the payoff matrix look like in that case?
C
1 yr

free

D
1

C
1 yr
5 yrs

5 yrs

3 yrs

3
3

D
free

3 yrs

0
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Now that we know what a game is, i.e., understand the exact meaning of the
primitive terms from which game theory is constructed , it is time to
specify assumptions (axioms) about how players will choose.

What do you think the Row player will choose when facing the following
payoffs?
X

A
1

It seems quite obvious, intuitively, what Row should do: B gives him a
higher payoff than A no matter what the Column player chooses. In game
theory we say that B dominates A, and that strategy is dominated (by B in
our case.)
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How would we generalize this observation to an axiom of choice?

Axiom 1: Never play a strategy that is dominated (by some other strategy.)

So what would you predict the two players will do in the following game?

Y
0

A
1

0
1

B
2

It sure depends on what they know about each others payoffs. If Column
knows Rows payoffs and knows that Row is rational, as defined by Axiom
1, then he also knows that Row is going to play B and hence Columns best
choice is to play X.
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But this calls for another axiom that deals with players information:
Axiom 2. The payoff matrix and Axiom 1 are common knowledge.
(Common knowledge: I know that you know that I know that you know ..)

With this axiom predicting what happens in our game is easy:

Row player wont play A since it is dominated by B. Thus he will play B.
Column knowing that Row will play B will choose to play X since
it gives her 1 as opposed to 0 if she were to play Y .

Y
0

0
1

B
2

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Lets see now how far the two axioms will take us in predicting what happens
in certain games, Prisoners Dilemma for instance.

D
2

0
0

D
3

Strategy D of Row dominates strategy C. From Axiom 1 Row will play D.

For Column the situation is identicalColumn will play D as well.

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And hence the dilemma (paradox) of the Prisoners Dilemma: Both players
choose D (and get 1) even though they would both be better off choosing C
(and getting 2.)
C

D
2

0
0

D
3

And note that to arrive at that conclusion we do not need Axiom 2 at all,
Axiom 1 is all that we need.

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NOTE:
Behind all games that we have looked at so far there is an assumption that
players have to decide what to do without knowing what the other player will
do or has done.
Such games are represented by payoff matrices and are called normal form or
strategic form games.

Already the simple framework of normal form games can help us understand
the most fundamental problem of political science: the emergence of state its
role in regulating human interactions. The argument of Thomas Hobbes in
Leviathan can be easily depicted as follows:

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Imagine the following stylized depiction of the Hobbesian state of nature.

Two hunters, carrying sizable clubs and hunting trophies meet on a narrow
mountain path.

Hit
Third
best for
Row

Both down,
possibly dead but
at least seriously
injured

Hit
Worst
for
Row

Not Hit

3
Row down ,
Column fine and
with Rows
trophies

Not Hit

Column down ,
Row fine and
with Columns
trophies

Best for
Row

Both fine and both

with their own
trophies

Second
best for
Row

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But this is the Prisoners Dilemma game. The prediction is that they will
both hit. Even though they both know they are heading for disaster, neither
has an incentive to avoid it. This is the essence of Hobbes state of war (state
of nature) problem.
HOBBESIAN ARGUMENT FOR THE NECESSITY OF STATE

nH
1

H
0

H
1

punish unlawful
actions

H
-1

nH
0

-1

Leviathan

3
3

nH

1
1

nH

(in my example the penalty is -2

added to each payoff resulting
from hitting)

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Political science is the science of transcending the Prisoners Dilemma.

(Jon Elster)

In Leviathan the state arises to solve the Prisoners Dilemma problem.

Recall the ingenious solution of Jean-Jacques Rousseau (On the Social
Contract):

Rousseau formulated the problem as follows: Find a form of association

which defends and protects each associate yet everyone while united with
all remains as free as before.
This is THE GREAT insight of Rousseau. The problem he poses sounds
like how can we have a cake and eat it too? How is it possible to have
a Leviathan at no cost, without losing any freedoms? As before, the
simple framework of a PD game will allows us to see the core of
Rousseaus idea.

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In PD game both Row and Column will choose to defect (D.) But what
would Row do if he were to choose Columns action instead of his own?
Which of the two actions of Column is best for Row? Cooperation (C),
of course. And thus comes Rousseaus solution: let Row choose for
Column and Column choose for Row. The two trade rights to control
each others actions.

COLUMN

D
3

C
3
ROW

0
0

D
5

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But the role of state is not limited to solving the Prisoners Dilemma.
Schelling: (recall the library meeting example) A different,
independent, function of state is coordination: which side of the road are
we driving on, where do we put street lights, pedestrian crossings, how to
proceed with street cleaning, evacuations, etc.
Games like the one in the library example are called coordination
games.
How about using the glasses of game theory to gain a few other insights
into the nature of human interactions?

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