Game Theory

1. Game Theory Mike ShorLecture 8 “The power to constrain an adversary depends upon the power to bind oneself.” - Thomas Schelling

2. Strategic Moves • Devices that manipulate the rules of the game: • Commitments • Threats • Promises • Being irrational

3. Strategic Moves • All require commitment! • It’s not enough to say you are going to do something. • The other player must believe you will.

4. Talk is Cheap Debt-ceiling negotiations: • Obama threatens to veto any bill that doesn’t: • Included revenue increases • Extend the ceiling through the 2012 elections • Which threat is credible? "This is the only viable plan, right now, that will do that," said Sen. Tom Coburn (R-Okla.) "And I will bet you a porterhouse steak that, if it lands on his desk, he'll sign that puppy."

5. Talk is Cheap Debt-ceiling negotiations: • Agreed to $2.4 trillion in additional debt (details a little complicated) • Super-committee must find $1.5 trillion to cut, otherwise automatic cuts to defense and domestic spending. • Why have a trigger? • Will it work?

6. Threat vs Warning? • The book draws the distinction between a threat and a warning. • A threat is a promise to do something not in your interest: Parent: “If you don’t improve your grades, I won’t buy you a car.”

7. Threat vs Warning? • The book draws the distinction between a threat and a warning. • A warning is a promise to do something in your interest: Parent: “If you don’t improve your grades, I will buy you a cheap car.”

8. Promise vs assurance? • Similarly, an assurance is a promise to do something in your interest: “Next time, I’ll put on sunscreen.” “Don’t worry, I will drive safely.”

9. Promise vs assurance? • Similarly, a promise is something not in your interest: “I promise I won’t stay out late.” “I promise I will pay you back.”

10. Strategic Moves • A threat/promise is not in your best interests (by definition). • It’s not enough to say you are going to do something. • The other player must believe you will. • How can you commit to doing something not in your best interests?

11. Example: Thomas Schelling • Used to advice people that if they wanted to stop smoking, they should write a large check to the American Nazi Party and mail it if the every smoked. • Problem: would you mail it? • Solution: stickK.com

12. Example: Thomas Schelling • Alternative: http://www.thinkgeek.com/stuff/41/snuznluz.shtml(apparantly not real)

13. Examples: • Other examples: • http://www.stopbitingnails.com/ • Automatic savings plan • Brushing teeth early in the evening so that you won’t eat. • Bart Simpson: in a Christmas special, he drinks lots of water the night before. Why?

14. Commitment Devices • What are some of your commitment devices? • Some of mine: • Moving to Arkansas for a summer • Membership to a gym

15. Dr. Strangelove • http://gametheory.net/media/Doomsday.wmv

16. Commitment Strategies • Establish and Use Reputation • Examples: • Alexander Hamilton paying off the national debt. • He knew this was important to establishing national credibility. • A US Bond is now the prototypical “Secure” investment. • Once you have a good reputation, it is more costly to default. You lose the reputation!

17. Commitment Strategies • Example 2: Negotiating with Terroists • Israel and the USA both refuse to negotiate with terrorists. Why? • It diminishes the incentives to take hostages! • Is it credible? • Both know if they ever relent to save one set of hostages, even more hostages will be taken.

18. Commitment Strategies • Sometimes it helps to destroy your reputation. • USA doesn’t want to negotiate with terrorists. • How can we commit? • Negotiate once • After settlement is reached, renege and attack hijackers anyway • Future hijackers will know you can’t be trusted • You won’t be able to negotiate in the future.

19. Commitment Strategies • Sometimes a reputation for irrationality works just as well. • Children and temper tantrums • Crazy guys and fights

20. The Bocchicchio Family “ Once a particularly ferocious branch of the Mafia in Sicily, it had become an instrument of peace in America. ” • How can Michael invite Don Tessio for a meeting and guarantee that Don Tessio will not be harmed?

21. Commitment Strategies • The Bocchicchio Family has a reputation of seeking revenge at all costs: • Revenge at all costs is irrational. • Presumably family members that started it were just crazy. Why do future generations maintain reputation? • If the Bocchicchio’s will persue revenge at any cost, why does this gaurantee Don Tessio’s safety?

22. Commitment Strategies • Other strategies? • Write Contracts • Burn Bridges • Move in small steps • Use others/teamwork • Use an agent

23. Removing Strategies II Sometimes, you should burn bridges. • Burning Bridges • Power comes from not being able to retreat • Cortes upon arriving in Mexico – he scuttled all of his ships.

24. Building Bridges Build bridges for your opponents. “When you surround an enemy, you must leave an outlet for him to go free.” –Sun-Tzu

25. Commitment Strategies • Use others/teamwork: • Joining a team increases your “shame” from failing • Training for a marathon with a group • Alcoholics Anonymous • Army

26. Commitment Strategies • How does the Army get everyone to attack? • Each soldier has the incentive to fight a little less hard than everyone else • The battle will be won or lost either way, but he is more likely to survive.

27. Commitment Strategies • Roman Army: • Attacked in Lines • Falling behind was a capitol offense • If you saw someone fall behind, you were supposed to kill them immediately. • Not killing the deserter was also a capitol offense!

28. Commitment Strategies • West Point: • Cheating is an honor code violation • Not reporting a cheater is an equal honor code violation!

29. Using and Agent You are not always better off with more options. • Delegation • In contract negotiation, can “squabble” over many details • Instead, send an agent with power of attorney to “sign as is” or “walk away” • Haggling over prices in a department store Learn from government bureaucracy: “The rules won’t allow me to do what you ask!”