Game Theory

Lecture 1
 Poker
Do you play poker?
Do you play the probabilities?
What happens when someone bluffs?
 John von Neumann
1928 - Mathematical genius von Neumann,
25, plays poker, invents game theory.
Sees someone bluff and realizes that the
best way to play the game is not to play
the probabilities but to play according to
what moves the competition makes.
Figures out mathematically what the
optimal moves are when two rational
people play a game.
 Game theory is about not making moves
in a vacuum, but about making moves
based on your evaluation of what your
opponents most likely moves will be.
And assuming that your opponent is rational
and smart (able to think strategically).
Look forward and reason backward.
Game theory is the science of rational
behavior in interactive situations.
 1944 - von Neumann is a major force in
inventing the atomic bomb and the
modern computer.
1950 - Two Rand Corporation scientists
invent the Prisoners Dilemma game.
 The Prisoners Dilemma
In 1950 a conductor on a train to Kiev
rehearses for a Tchaikovsky concert.
KGB arrests him for subversive activity.
KGB arrests Boris Tchaikovsky, a worker,
on the streets of Kiev.
KGB puts them in separate cells so they
cant communicate.
KGB offers them both a deal.
 The Prisoners Dilemma

If the conductor turns state evidence

against Boris (rats) and Boris doesnt, he
gets one year in a gulag and Boris gets
25 years.
If the conductor doesnt rat and Boris
does, the conductor gets 25 years in a
gulag and Boris gets only one year.
 The Prisoners Dilemma
If both rat, each gets 10 years.
If neither rats, each get three years (for
doing nothing).
The silent auction begins.
Because they cannot communicate, they must
each figure out what the other will rationally
do, and act accordingly.

They are acting simultaneously.
 The Prisoners Dilemma
Each serve 10 years, meet in the gulag,
begin talking, and discover they ratted on
each other.
While talking they realize that if each had
said nothing, they would only have been in
for three years.
 Payoff Matrix
Boris
Rat Not Rat

Rat 10, 10 * 1, 25

Conductor

Not Rat 25, 1 3, 3

* Conductor, Boris
 Prisoners Dilemma

We have your friend Tchaikovsky and he is

starting to talk

Should the conductor confess?

Conclusion:

The Conductor will confess.

And Tchaikovsky?

Conclusion:

Tchaikovsky confesses also

Both get 10 years, even though if they cooperated,

they could get off with 3 years each

For both, confession is a dominant strategy: a

strategy that yields a better outcome regardless of
the opponents choice
What would the Conductor and
Tchaikovsky decide if they
could negotiate?

They could both become better off if

they reached the cooperative solution.
which is why police interrogates suspects in
separate rooms.

Equilibrium needs not be efficient. Non-

cooperative equilibrium in the Prisoners
dilemma results in a solution that is not the
best possible outcome for the parties.