Bayes-Nash equilibrium with Incomplete Information

1. Bayes-Nash equilibrium with Incomplete Information

2. What’s New here? Incomplete information: Example: Battle of the sexes game,But Bob doesn’t know what Alice wants (i.e. her payoffs from possible outcomes) In previous examples we had “Imperfect Information”. Players Knew each others payoffs, but might not know each other’s moves.

3. She loves me, she loves me not? (Bob moves before Alice) Nature She scorns him She loves him Bob Bob Go to A Go to B Go to A Go to B Alice Alice Alice Alice Go to B Go to B Go to A Go to A Go to A Go to B Go to A Go to B 3 2 1 1 0 0 2 3 3 0 2 1 0 2 1 3

4. How we handle this story • Nature moves first—Tells Alice whether she loves Bob or despises him. • Nature doesn’t tell Bob. • Bob has probabilistic beliefs about Alice’s inclination. • Whatever Bob does, Alice knows how she feels and acts accordingly. • Bob is aware of this, but doesn’t know how she feels.

5. She loves me, she loves me not? (Bob moves before Alice) Nature She scorns him She loves him Bob Bob Go to A Go to B Go to A Go to B Alice Alice Alice Alice Go to B Go to B Go to A Go to A Go to A Go to B Go to A Go to B 3 2 1 1 0 0 2 3 3 0 2 1 0 2 1 3

6. Bayes-Nash Equilibrium • Alice could be one of two types. “loves Bob” “scorns Bob • Whichever type she is, she will choose a best response. • Bob thinks the probability that she is a ``loves Bob’’ type is p. • He maximizes his expected payoff, assuming that Alice will do a best response to his action.

7. Expected payoffs to Bob • If he goes to movie A, he knows that Alice will go to A if she loves him, B if she scorns him. His expected payoff from A is 2p+0(1-p)=2p. • If he goes to movie B, he knows that Alice will go to B if she loves him, A if she scorns him. His expected from B is then 3p+1(1-p)=2p+1. • For any p, his best choice is movie B since 2p+1>2p for all p.

8. Does she or doesn’t she?Simultaneous Play Nature She scorns him She loves him Bob Bob Go to A Go to B Go to A Go to B Alice Alice Alice Alice Go to B Go to B Go to A Go to A Go to A Go to B Go to A Go to B 3 2 1 1 0 0 2 3 3 0 2 1 0 2 1 3

9. Bayes’ Nash equilibrium • Is there a Bayes’ Nash equilibrium where Bob goes to B and Alice Alice goes to B if she loves Bob, and to A if she scorns him? • This is a best response for both Alice types. • What about Bob?

10. Bob’s Calculations If Bob thinks the probability that Alice loves him is p and Alice will go to B if she loves him and A if she scorns him: • His expected payoff from going to B is 3p+1(1-p)=1+2p. • His expected payoff from going to A is 2(1-p)+0p=2-2p. Going to B is Bob’s best response to the strategies of the Alice types if 1+2p>=2-2p. Equivalently p>=1/4.

11. Is there a Bayes-Nash equilibrium in pure strategies if p<1/4? • Yes, Alice goes to B if she loves Bob and A if she scorns him and Bob goes to B. • Yes, Alice goes to A if she loves Bob and B if she scorns him and Bob goes to B. • Yes there is one, where Alice always goes to A. • No there is no Bayes-Nash equilibrium in pure strategies.

12. What about a mixed strategy equilibrium? • If p<1/4, can we find a mixed strategy for Bob that makes one or both types of Alice willing to do a mixed strategy? • What if Bob knows Alice scorns him? • Consider the Alice type who scorns Bob. If Bob goes to movie A with probability q, When will Alice be indifferent between going to the two movies?

13. The game if Alice hates Bob Bob Alice

14. Mixed strategy equilbrium: Bob the stalker • If Bob knows Alice hates him, then if he uses a pure strategy, he knows Alice would always avoid him. • If he uses a mixed strategy, he would catch her sometimes. • In mixed strategy Nash equilibrium, each would be indifferent about the two strategies.

15. Making Alice indifferent • If Bob goes to B with probabilty b: • Expected payoff to Alice from going to A Is 3b+(1-b) • Expected payoff to Alice from going to B is 2(1-b) • These are equal if 2b+1=2-2b or b=1/4. • So Stalker Bob would go to Alice favorite movie ¾ of the time.

16. Making Bob indifferent • If Alice goes to movie A with probability a • Bob’s expected payoff from going to A would be 2a+0 • Bob’s expected payoff from going to B would be a a+3(1-a) • Bob would be indifferent if 2a=3-2a which means a= 3/4 • So Alice would go to her favorite movie ¾ of the time • Then Bob would meet her at A with probability ¾ x ¾=9/16 and at B with probability ¼ x ¼ =1/16.

17. Expected payoff • In the mixed strategy equilibrium, where Alice scorn him, Bob’s expected payoff is 2(9/16)+1(3/16)+0(3/16)+3(1/16)=3/2. and expected payoff for Alice is 1(9/16)+3(3/16)+2(3/16)+0(1/16)=3/2

18. Wyatt Earp and the Gun Slinger

19. A Bayesian gunslinger game

20. The gunfight game when the stranger is (a) a gunslinger or (b) a cowpoke

21. What are the strategies? • Earp • Draw • Wait • Stranger • Draw if Gunslinger, Draw if Cowpoke • Draw if Gunslinger, Wait if Cowpoke • Wait if Gunslinger, Draw if Cowpoke • Wait if Gunslinger, Wait if Cowpoke

22. One Bayes Nash equilibrium • Suppose that Earp waits and the other guy draws if he is a gunslinger, waits if he is a cowpoke. • Stranger in either case is doing a best response. • If stranger follows this rule, is waiting best for Earp? • Earp’s Payoff from waiting is 3/4x1+1/4x8=2.75 • Earp’s Payoff from drawing, given these strategies for the other guys is (¾)2+(1/4) 4=2.5 • So this is a Bayes Nash equilibrium

23. There is another equilibrium • Lets see if there is an equilibrium where everybody draws.