## Revision ad81431347b10d6153c9e003f5e5e5955fa36435 (click the page title to view the current version)

# Game Theory

# Reading

- Cursory: Dawid and Kopel 1998
- This is the simulation we will be working with, but it is not necessary to read all the details of economics

- R&N Chapter 6 on Game Theory
*Most importantly*review Genetic Algorithms and make sure that you can run and tune the solver to solve different optimisation problems

# Economic Simulation

- the population models a real population
- we are interested in the behaviour of the population as a whole, not just one individual, optimal behaviour
- related to agent-based simulation; we simulate a population of agents.

- payoff depends on all player strategies
- as opposed to an externally given and static function
- hence it is impossible to simulate a single agent; only a population makes sense

- goal: find equilibrium
- possibly with different co-existing solutions

- e.g. the cobweb model

## Cobweb Model

- famous market model
- \(n\) companies produce the same good
- company \(i\) can choose the quantity \(q_{i,t}\) to produce in period \(t\)
- companies do not know the price \(p_t\) when they decide \(q_{i,t}\)
- the price \(p_t\) is determined as a function \(p_t(q_t)\) of the total production \(q_t=\sum_i q_{i,t}\)
- under some (but not any) conditions there is a unique, analytic equilibrium

## Exercise

- Use the demo at github
- GASim.py implements the CobWeb model according to Dawid and Kopel 1998
- The
`CobWeb`

class is instantiated with Dawid and Kopel’s parameters, \(a\), \(\alpha\), \(\beta\), and \(\gamma\) - An analytic equilibrium exists if \[\alpha < \frac{a^2\beta}{(2\beta+\gamma)^2}\]

Your task:

- Review the code.
- How does the simulation work?
- What differs from the regular GA optimisation?

- There are a few new python features which may want to have a look at
- use of command line arguments
- plotting

- Run the experiment and produce the plots
- What dos the plot tell you?

- Dawid and Kopek report on two experiments, with \(\alpha=0.25\) and \(\alpha=1\), only the formal has an analytic equilibrium.
- Do the simulations behave differently?

- The payoff is discontinuous at \(q=0\), and such a point may have particular interest. Yet, as a random chromosome, it is no more probable than any other. Dawid and Kopek suggest modifying the encoding, adding an extra bit \(b\) interpreted as follows
- if \(b=0\), then \(q=0\) regardless of the other bits.
- if \(b=1\), then \(q\) is defined by the remaining bits as usual Implement this representation and check if it changes the behaviour of the population.

## Bonus Exercise

A different economic model, of land auctions, has been simulated by Balmann and Happe 2001.

Can you replicate their experiment, using the demo code as a starting point?

# Simulating Games

- Recall intelligent agents in adversarial games
- minimax algorithm

- Chromosomes can represent game strategies or move sequences
- GA provides an alternative to the minimax algorithm
- GA can also explore games where minimax is not appropriate

- Repeating the game changes the dynamics
- particularly if the game is not zero-sum
- Prisoner’s Dilemma

- Psychology of Games
- expectation
- trust

- Several scenarioes
- optimisation
- tournament selection playing a game

- Many things can be optimised by GA
- Action sequences
- Neural networks
- Functions (e.g. inverse functions)

## The Aberdeen Exercise

This game is asymmetric.

One player is an incumbant firm and the other is a new entrant. The incumbant firm is active in a market and has a steady income therefrom.

The new entrant moves first, choosing whether or not to enter the market. The incumbant firm (the responder) can choose either to fight or accept. If they accepts, the two players share the profit from the market. If they fight, they lose money by outbidding the new entrant, but by virtue of superior capital they can bar the entrant who would lose even more. The payoff matrix could look like this, with payoff given for new entrant/incumbant firm.

Accept | Fight | |
---|---|---|

abstain | 0/25 | 0/25 |

enter | 10/10 | -5/-2½ |

Regular minimax optimisation leads to the equilibrium of enter/accept. However, in practice, there are many markets where we observe a fight strategy. The rationale for this is that if the incumbant firm can create an expectation that they will fight, nobody dares enter, and they get their status quo payoff as 25, which is optimal.

This behaviour only makes sense in a repeated game, where expectations can be built over time.

*Can you make a GA simulation of this game?*

## The Centipede Game

**Source** Investopedia

The centipede game is an extensive-form game in game theory in which two players alternately get a chance to take the larger share of a slowly increasing money stash. It is arranged so that if a player passes the stash to their opponent who then takes the stash, the player receives a smaller amount than if they had taken the pot.

The centipede game concludes as soon as a player takes the stash, with that player getting the larger portion and the other player getting the smaller portion. The game has a pre-defined total number of rounds, which are known to each player in advance.

(This game is also asymmetric. There is a difference between moving first and moving last, even if the roles are otherwise equal.)

## Exercises

Implement the following version of the centipede game.

- Two players play, taking turns.
- The lot starts at zero and increases by £2 per turn.
- The player on turn can choose
*take*or*pass*.- if he tskes, the players take half the lot each, and the player on turn gets £2 extra.
- if he passes, the other player is on turn

- The game continuous for 128 turns.
- If the last player passes, they share the lot of £256.

The number of rounds passed constitutes a player strategy.

In this game, the payoff (cost) only makes sense when two players are played against each other. Thus, to evaluate the cost function, the chromosomes must be paired at random and the game played.

Note that the players want to maximise their payoff, not (primarily) beat the opponent. Hence tournament selection based on playing the game is hardly appropriate.

**Question**

- What is intuitively the optimal strategy?
- What is the analytically optimal strategy?

Is this different from your intuition? - What would be the optimal strategy in tournament selection?