GAMES AGAINST NATURE

Topic #3

Games Against Nature

In game theory, for reasons that will be explained later,
the alternatives (e.g., LEFT and RIGHT) that each player
chooses from are usually called strategies,
but they may also be called choices, actions, etc.

A Game Against Nature is

a 1-player game, in which a single rational self-interested player
must choose a strategy, and
the outcome and the players payof depends on both his
chosen strategy and the choice made by a totally
disinterested nature.

A Game Against Nature part of what is generally called

decision theory (rather than game theory) because
there is only one player who
makes a rational choice, and
is interested in (gets a payoff, i.e., a gain or loss, from) the
outcome.

A Decision Problem without Risk or

Uncertainty
Choices for P1

s1
s2
s3
s4
s5

x
y
z
v
w

=>

Outcomes

=>

Preferences/Payoffs/Utility

u1(x) = 4
u2(y) = 5
u3(z) = 3
u4(v) = 4
u5(w) = 3

In this case, Nature makes no choice, so

the decision problem is conceptually trivial, i.e.,

P1 should choose the strategy that gives him the best
outcome,

in this case s2.

However, such decision problems are often difficult in

practice, because the decision maker may not know how to
predict or evaluate the payofs from the different outcomes,

but this problem is essentially one of information and

research, not strategic choice.

But decision/game theory focus on the problem of

strategic choice, and assumes that all players know
their payoffs.

A Literal Game Against

Nature

A payof matrix is set up as a crosstabulation of P1s

strategies and Natures contingencies (or another
players strategies).
This is the simplest possible non-trivial matrix , with two rows
and two columns.

Numbers in each cell of a payoff matrix indicate the

payoff (or at least rank the payoffs) to each player
given by the resulting outcome.
In this case, there is only one number in each cell because
there is only one player, and
nature is indifferent among outcome and has no payoffs.

The Maximax Principle

We now identify several different decision principles

(some of which may be poor principles) that player P1
might use in order to pick his strategy.
The Maximax Principle (informally, aim for the best):
choose the strategy that can give you the best outcome.
In this case, maximax says choose s2.

Note however that s2 can also give you your worst

outcome,
so maximax can mean aim for the best --- but get the worst.

The Maximin Principle

Maximin Principle (informally, avoid the worst):

For each strategy, determine the worst outcome (minimum
payoff) you could possibly get if you select that strategy;
this is called the security level for each strategy.

In this case ,
the security level of s1 is 2, while
the security level of s2 is 1.

Then choose the strategy that gives you the highest security
level,
i.e., the maximum of the minimums or maximin.

In this case, s1 is P1s maximin strategy, and by using it P1 can

guarantee a payoff of at least 2, regardless of what Nature
does.

Maximax
vs.
Maximin
For reasons that
will be made
evident later,
the term
minimax is
used more
commonly than
maximin.

The Principle of Insufficient

Reason

The Principle of Insufficient Reason (informally,

maximize the average payoff):
choose the strategy the gives you the highest average payof
(averaged across contingencies).
In this case, s1 and s2 have the same average value (2.5).

This principle has two big problems:

It assumes that the payoffs are cardinal [or interval], whereas
the payoffs displayed in the matrix above are probably just
ordinal.
It also in effect assumes that all contingencies are equally
probable.

Decision Making (cont.)

In general, Natures choice of contingencies may be

made
by an objective and known (to the player) random mechanism
(e.g., at a Las Vegas gaming table);
This is called decision making under (objective) risk;
or by some process concerning which the player has subjective
probability estimates (e.g., whether it will rain or shine);
This is called decision making under (subjective) uncertainty.
In either event, it is unlikely that all of natures contingencies are
equally probable.

Principle of Expected Utility

Maximization

Principle of Expected Utility (or Payof) Maximization:

The payoff matrix has been modified to show cardinal (or interval),
rather than merely ordinal, payoffs.
Choose the strategy that gives you the highest expected payofs,
weighting each contingency by its (objective or subjective) probability.
This requires that
payoffs are cardinal (or interval) in nature and
the decision maker knows the probability over natures
contingencies .
Given p = p = .5, the expected payoff from s1 = 6 and from s2 is
5, so P1 should choose S1.
If p = .25 and p = .75, the expected payoff from s1 is 7 and from
s2 is 7.5, so P1 should choose s2.
1

Expected Utility Maximization

(cont.)
If rain is certain, P1 definitely should take his umbrella
If shine is certain, P1 definitely should not take his umbrella
How probable does rain have to be so that P1 (if he is
maximizing expected payoffs) should choose to take his
umbrella?

Put otherwise, what is the probability rain that leaves P1 indifferent

between his two strategies (because they have the same expected
payoffs)?

Let p (0 < p < 1)be the probability of rain, so the probability of

shine is (1-p).

Expected Payoff from S1 = Expected Payoff from S2

4p + 8(1-p) = 0p + 10(1-p)
6p = 2
p = 1/3
(and p = 2/3)
In which case the expected payoff from s1 = 4/3 + 16/3 = 20/3 = 7.333 ,
The expected payoff from s2 = 0/3 = 20/3 = 7.333

Eisenhower Before D-Day

D-Day weather decision made by Supreme Allied Commander.

D-Day June 5 was postponed due to a storm in the channel and
another storm was predicted to arrive shortly after the first.
RAF Meteorologist James Martin Stagg predicted there would be a
brief window on June 6 with a break in weather.
Eisenhower: OK lets go.
Marginal weather predicted for June 6 may have been
advantageous in terms the (Zero-Sum) Game Against the Germans
(as opposed to the Game Against Nature).
To invade only with favorable tides and full moon entailed
disadvantages in terms of the Game Again the Germans but
evidently more than compensating advantages in terms of the
Game Against Nature.
The Game Against the Germans was, in this respect, strictly
determined (as defined in Topic #5).

Eisenhower Before D-Day

(cont.)

Eisenhower Before D-Day

(cont.)

Cardinal Payoffs $$

Generally, you can think of cardinal payoffs as being essentially

equivalent to money, but not always.
Consider a game with two players plus Nature:
P1 is you, deciding whether to buy home-owners (fire) insurance;
P2 is an insurance company, deciding whether to sell you a policy;
Nature decides whether your home will burn down in the next year.

If you and the insurance company have the same beliefs about the
probability that your house will burn down in the year, is there a
premium price such that you will buy and they will sell
Not if payoffs = expected $$$.
You probably are not risk-neutral but rather risk-averse.
But the insurance company, insuring millions of widely dispersed house,
can afford to be risk neutral.

Ditto in a game between you, a Las Vegas gaming house, and Nature.
If you win the state lottery, are you indifferent between these two
prizes?
Prize 1: $1,000,000
Prize 2: Another lottery ticket, which gives you a .5 chance of winning
$2,000,000 and a .5 chance of winning $0.

Decision Problems Some

Practice

Decision Problems More

Practice

But can you see another and very persuasive

decision principle lurking in this example?

The Dominance Principle

The Dominance Principle (D & N, Rule 2, p. 66):

If strategy A gives you at least as good a payoff in
every contingency as strategy B and a better
outcome in at least one contingency,
do not choose strategy B (as it is dominated by strategy A);
choose an undominated strategy instead.

In the payoff matrix above, s2 dominates both s1 and

s3, so P1 should not choose s1 or s3.
Put otherwise, S2 is at least as good a reply as s1
(or s3) in every contingency and is a better reply in
at least one contingency.

The Dominance Principle

(cont.)

Important note: the Dominance Principle says:

if strategy A dominates strategy B, dont use strategy B.

The Dominance Principle does not say:

if strategy A dominates strategy B, use strategy A, because
there may be some strategy C that dominates A, or more likely
there may be some strategy D that is undominated and which gives
a larger payoff than A in some contingency.

In the matrix above, s2 and s4 are both undominated,

that is, each is a best reply in some contingency.

The Dominance Principle

(cont.)

In the modified payoff matrix above, s2 now

dominates s4 (as well as s1 and s3),
so s2 is a dominant strategy.

A dominant strategy if a best reply in every

contingency.
Corollary of Dominance Principle: If you have a
dominant strategy, use it.
Notice that the Dominance Principle does not
require cardinal payoffs in order for it to be applied, and
does not depend on the probabilities of the contingencies.

The Dominance Principle (cont.)

The Dominance Principle is consistent with every
decision principle discussed earlier.
If s1 dominates s2,

s2 cannot be uniquely maximax;

S2 cannot be uniquely minimax
S2 cannot have a higher average payoff
S2 cannot have a higher expected payoff.

But typically players may have many (even only)

undominated strategies and
only rarely do players have dominant strategies.

Therefore, while the Dominance Principle is very

good advice where it applies, it very often does
not apply.

The Dominance Principle (cont.)

The Dominance Principle appears to be a good
principle to follow, not only in Games Against
Nature, but also in Games Against Other Players.
This is not true of the other Decision Principles.
But notice that RIGHT dominates LEFT in the Social
Dilemma Game (and compare with the Prisoners Dilemma
Game in Topic #4).

Two examples of dominant strategies (one trivial,

one tragic):
Following another car into an almost full parking garage.
Passengers on United #93.
A threat to use a dominant strategy is highly credible (as
will be discussed in Section II of the course).