Game Theory and Expected Utility Theory

POLS 331: Introduction to Word Politics (Professor Tarar)

Game Theory
What is it? A set of tools used to study interactive decision-making
When there are at least 2 decision-makers

Game Theory
Why is it useful for studying international relations? Because a lot of what is important in international relations involves decisions by two or more leaders And hence we want to understand how their preferences and interactions lead to outcomes
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Prisoners Dilemma
C C 1 D

2 D

3,3 5,0

0,5 1, 1

2 players each has to choose C or D C = cooperate, D = defect they choose simultaneously payoffs are given in table Payoffs: DC > CC > DD > CD
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Prisoners Dilemma
C C 1 D

2 D

3,3 5,0

0,5 1, 1

What should each player do? Dominant strategy a strategy that is best for you no matter what you expect the opponent to do Individual rationality leads to suboptimal outcome hence the dilemma
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Prisoners Dilemma
C

3,3 5,0

0,5 1,1

can represent arms races: D = build new arms, C = dont can represent trade preferences: D = impose tariffs, C = dont

DC > CC > DD > CD

PD illustrates realist idea that cooperation is difficult under anarchy what if binding agreements possible?

Prisoners Dilemma

What if there is an international institution that imposes a penalty of 3 points for D?

3,3 5,0

0,5 1,1

3,3 2,0

0,2 -2 , -2

Stag Hunt
C

2 D

C 1 D

5,5 3,0

0,3 1,1

same as PD, but now each each player prefers mutual cooperation to exploiting

Payoffs: CC > DC > DD > CD does either player have a dominant strategy?
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Stag Hunt
C 1

5,5 3,0

0,3 1,1

Nash equilibrium: a set of strategies, one for each player, such that no player can do better by changing its strategy, given the strategies of the others

each player is choosing a best response to what the others are doing Pareto-dominant equilibrium
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Sequential-Move Games
Extended Deterrence:
ATTACKER not attack DEFENDER 2 not defend

Game tree Backwards induction

3 3 1

1 2

Subgame-perfect equilibrium

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Security Council Game

BUSH ADM. no resolution resolution SECURITY COUNCIL ? ? ? reject approve FRANCE ? ? ? ? ? ? not veto ? ? ?

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Inspectors Game
BUSH ADM. nothing attack send inspectors IRAQ cooperate BUSH ADM not not attack attack not BUSH ADM

? ?

? ?

? ?

? ?

? ?

? ?
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Expected Utility Theory

Now let us consider single-player decisionmaking The player has a set of actions Each action leads to a certain outcome The player has preferences over the outcomes
These preferences can be represented using numbers that are called payoffs or utilities A higher number indicates a more preferred outcome

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Expected Utility Theory

For example, the actor can choose:
Attack another country Do not attack

Suppose the payoffs are as follows:

Attacking: 5 Not attacking: 3

The actor will choose to attack Principle of rational choice: you choose an action that leads to a most preferred outcome
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Expected Utility Theory

But sometimes the link between actions and outcomes is uncertain Two (or more) possible outcomes may result from a given action, and you are not sure which one will result Hence you are not sure which action to choose

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Expected Utility Theory

The solution: assign probabilities to the different outcomes occurring, and then calculate expected utilities for the different actions Suppose that if you attack the other country, either you will win or lose the war Two possible outcomes can result from attacking
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Expected Utility Theory

Suppose utilities are as follows:
Not attack: 3 Attack and win the war: 6 Attack and lose the war: 2

Not clear whether it is rational to attack or not Depends on how likely you are to win the war
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Expected Utility Theory

Suppose you win the war with probability 1>p>0, and lose with probability 1 p To calculate the expected utility for an action, we multiply the probability of each outcome (that can result from that action) by the utility for that outcome, and then add them all up EU(attack) = (p)(6) + (1 p)(2) = 4p + 2 EU(not attack) = 3 Rational to attack if 4p + 2 > 3, or p >
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Expected Utility Theory

Principle of rational choice: you choose an action that gives you the highest expected utility Principle is the same if there are 3 or more outcomes that can result from a given action: multiply probabilities by utilities, and then add them all up

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Expected Utility Theory

Expected utility theory is also used in game-theoretic models of incomplete information

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