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Games, Gambling and Game Theory

- Abhijit Kar Gupta

(This article is written for non-specialists, a Bengali version of which is published in ‘Anustup’, a
Bengali Magazine published from Kolkata, India: Kolkata Book Fair special issue, 2006.)

Economics, Sociology, Psychology and many other branches which deal with human
behaviours are getting united at a certain level with more and more applications of
Mathematics and insightful knowledge from Natural sciences like Physics. Powerful
techniques like Game Theory are being applied to arrive at conclusions previously
unthought-of. Physicists, Mathematicians and Computer Scientists are intruding more
and more, equipped with well-tested ideas and theories of their own subjects. Any branch
in Social science usually deals with a large amount of data automatically generated due to
various complex social interactions. Oldest and most prominent among them are with
monetary transactions and sexual interactions. However, there is no control over the large
pool of data on which a theory is based upon and can be tested. Interestingly, some
innovative experiments in the form of games are being designed to test how human
psychology influences choice which in turn is reflected in Economics and other social
theories. In fact, the complex human psychology is what primarily differentiates any
branch of social science from the Physics of many interacting molecules or particles.
Even classical Economics usually does not care about the psychological aspects of its
‘agents’. Agents have a wide variety of options to choose from in a certain real life
situation. They think rationally and take decisions. Here comes the question of ‘strategy’.
People adopt some strategy and change strategies. Conflict of strategies among various
interacting agents and the time variation of strategy of an agent in a changed scenario are
what make things really complex. In a way, it looks like the agents are into a complicated
Game of which the rules are though simple to start with; soon it goes out of hand and
defies predictability.

We often play games against Nature; whether to take a chance or not (‘to be or not to be’
as in Shakespeare). We take risks, calculated risks. We attempt to understand or
undermine uncertainties played by Nature. From Monte Carlo to Las Vegas to
everywhere in the world people indulge in gambling, invest in often unpredictable stock
market, all are games in some way or other. Consider the famous example of ‘St
Petersburg paradox’ put forward by famous Mathematician and Physicist Daniel
Bernoulli in the early eighteenth century. A coin is tossed, and if it falls heads, then the
player is paid one rouble and the game ends. If it falls tails, then it is tossed again, and
this time if it falls heads the player is paid two roubles and the game ends, otherwise it is
tossed again. The process continues for as long as necessary, with the payoff doubling
each time, until the player wins something and then it stops. The question is how long
one will be willing to play for the privilege of playing it? Usually the expected gain looks
like ever increasing as one continues playing but on the other hand one has the high
probability if losing everything.

Unfortunately, a clear and feasible solution of a game is often not possible. Only in some
cases of two-person zero sum games (gain of one person equals to exact loss of other)
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formal solutions are available. But real life problems with strategic interactions usually
defy clear cut solutions where the kind of games are often not zero-sum games and have
incomplete information. Contrary to the assumptions in classical Economic theory, we
human beings have ‘bounded rationality’ and we are able to solve only a few simplest
possible games in life. Consider the game of Chess which has complete information and
complete certainty against any of opponent’s move. But knowing this is of no help in
actually playing the game or to arrive at a definite solution. Let us calculate, the average
number of legal moves in a chess position is about 30, and a game of chess involves
about 40 moves from each player, therefore, the number of possible chess games can be
estimated to be something between around 10 to the power 100, far more than the number
of particles in the universe (about 10 to the power 80)!

Human behaviour is very interesting particularly in the backdrop of other human beings.
One influences the act of other and the ‘act of other’ influences the act of ‘one’ and thus
again ‘one’ influences the act of ‘other’…..and so on! Life is full of games and very
many complicated games. Decision of a person, decision of a society and that of a Nation
are based on Games. Whether to buy a stock in a share market or to sign a Nuclear non-
proliferation treaty, a mathematical analysis is possible and decision can be taken with a
calculated risk as opposed to the ‘no idea’-situation to an ignorant. The ‘Game Theory’ is
thus born.
Albert Einstein said: “Things should be made as simple as possible, not simpler’.
Theory of Games only simplifies the approach to take decision while one is entangled in
a complicated mess.

Imagine the following imaginary strategic interaction. Two people are arrested and
charged with involvement in a crime they committed together. They are held in separate
cells for interrogation and prevented from communicating with each other. The police
have insufficient evidence to obtain a conviction unless at least one of them discloses as
the case can not be proved in absence of any other evidence. Now each prisoner is faced
with a choice between concealing information from the police and disclosing it. If both
conceal, both will be acquitted with 1year of token imprisonment in absence of proper
evidence. If both disclose, both will be convicted with 5 years of imprisonment. If only
one prisoner discloses the information, that prisoner will not only be acquitted but will
receive an attractive reward also and who conceals will receive a rigorous imprisonment
of 10 years. The question is what will they do in such a situation? The criminals find
themselves in a dilemma. It is to their mutual benefit not to confess. However, each is
tempted to betray his or her partner in order to have greater benefit.
This is called ‘Prisoner’s dilemma’ which is one entry point to ‘Game theory’. If such a
game is to be played time and again in a real life situation, one may think of his strategy
whether to cooperate with others or defect all the time or take a strategy of ‘Tit-for-Tat’ or
something else. The person tries to become as rational as possible while taking decision
keeping the behaviour of other people in mind. Each player is rational, knows the other is
rational, knows that the other knows he is rational, etc. There has been eternal conflict
between 'altruism' and 'exploitation for personal gain' in a society of interacting
populations.
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Imagine another situation where two drivers on their way home are caught in a blizzard
and trapped on either side of a snowdrift. Each driver has the option to get out and start
shoveling or to remain in the cozy warmth of the car. If both start shoveling each has the
benefit of getting home while sharing the labour costs. However, if only one shovels both
drivers still get home but the lazy bum avoids the labour costs. Nevertheless the prospect
of getting home overcomes the waiting for the time to melt the snow. The question is
what should each driver do? This is called “Snowdrift” game which has been another
metaphor for cooperative interactions.

Cooperation in a society is usually analyzed in Game theory by means of such a non-zero

sum ‘game’ of interdependent and logical decision making. A new and fast growing
direction in Economics has been where experimental methods are devised to investigate
strategic interaction. A milestone and the foundation of game’s current fame represent
Robert Axelrod’s famous computer tournaments where the players interacted with
prisoner’s dilemma strategies. The winner was who adopted the Tit-for-Tat strategy who
started cooperating the opponent and did whatever the opponent did in the previous
move. The lesson was if the two players meet again and again with high probability, the
fear of retaliation in the future encourages the players to cooperate in the present. Of
course the cooperation is assumed to be established by many other factors like voluntary
participation, population structures as well as reward and punishment. All these are
analyzed in the framework of Game theory.

The phenomenon of cooperative interactions among animals has puzzled biologists since
Darwin. Nevertheless, the theoretical concepts to study cooperation appeared only a
century later and originated in Economics and Political Sciences.
If one traces the history of the theory of games of strategy (as we know ‘game theory’ by
now), the theory of games of chance has been the forerunner. This earlier theory
originated in the seventeenth century from attempts to solve practical problems of
gambling raised by members of the dissolute French nobility before the revolution. There
came the theory of probability which provided a foundation for the later development of
Statistics, Statistical Physics, Quantum Physics, Population Genetics and many other
important subjects. The theory of probability is traced by most historians to 1654, when
an exchange of letters took place between two great mathematicians Blaise Pascal and
Pierre de Fermat concerning the misfortunes of the French nobleman, the Chevalier de
Mere. The contributions towards the formation of games of strategy only started pouring
in at the early 20th century. German mathematician Ernst Zermello and French
mathematician Emile Borel prepared the ground work through their works. The onset of
modern game theory can be associated with the seminal contribution by Austro-
Hungarian extraordinary Mathematician and Physicist John von Neumann who emerged
from Budapest in the years after the First World War. Game theory became more widely
known after the publication in the United States of von Neumann and Morgenstern’s
classic book “Theory of Games and Economic Behavior” in 1944.
von Neumann was a genius and child prodigy who could divide eight-digit numbers in
his head when in six years old. He published his first paper at the age of 18. Entering the
University of Budapest in 1921, he studied Chemistry, moving his base of studies to both
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Berlin and Zurich before receiving his diploma in 1925 in Chemical Engineering. He
returned to his first love of mathematics in completing his doctoral degree in 1928.
von Neumann’s interests were exceptionally wide: his contributions to theoretical Physics
to mathematical concepts on which the modern computer is based, to Economics, to
History, to literature and language and so many other things. According to the famous
scientist and bibliographer Abraham Pais he could recall exactly what he read anything
only once. An excellent mathematician once stumbled on him as he was struggling to
solve a very difficult calculation over the last night and without sleep. When approached,
von Neumann closed his eyes for a minute, looked at the ceiling and started telling the
answers very correctly.
At a time of political unrest in central Europe, he was invited to visit Princeton University
in 1930, and when the Institute for Advanced Studies was founded there in 1933, he was
appointed to be one of the original six Professors of Mathematics, a position which he
retained for the remainder of his life. At the instigation and sponsorship of Oskar
Morganstern, von Neumann and another legendary Mathematician Kurt Gödel became
US citizens in time for their clearance for wartime work. There is an anecdote which tells
of Morganstern driving them to their immigration interview, after having learned about
the US Constitution and the history of the country. On the drive there Morganstern asked
them if they had any questions which he could answer. Gödel replied that he had no
questions but he had found some logical inconsistencies in the Constitution that he
wanted to ask the Immigration officers about. Morganstern strongly recommended that he
not ask questions, just answer them!

In 1972 the Nobel Prize for Economics was awarded to Kenneth J. Arrow whose work
was closely related to game theory. And in 1994 the prize was awarded to the game
theorists John Nash, John Harsanyi and Reinhard Selten. In fact, the Oscar winning
Hollywood movie ‘A beautiful mind’ (based on Sylvia Nasar’s book ‘A Beautiful Mind’)
is on the extraordinary life of John Nash. He went into some kind of delusion which is
known as paranoid schizophrenia for almost 25 long years when he was actually very
active in doing deep Mathematics and when his family life was at the beginning as his
wife was pregnant. It was amazing how he intellectually started rejecting some of the
delusionally influenced lines of thinking with a long struggle and came back to rational
thinking. And then he began his research afresh at the late age after a long gap which he
calls ‘sort of vacation’. John Nash’s main contribution, now known as ‘Nash Equilibrium’
(done at the early age, before he went into schizophrenia) is an extremely important
concept in Game theory and this has become an essential tool which has permeated most
of Social sciences and evolutionary Biology.
Imagine a situation where a number of rational agents with different interests have to
reach individual decisions by taking into account the decisions of others as well as their
own. In this case the problem of correctly anticipating the actions of others becomes
crucial. A Nash equilibrium is a situation where this has been achieved – that is, everyone
turns out to have acted in their own best interests in a way that correctly anticipates the
actions of everyone else. Once the equilibrium is reached, it is stable because no one has
an incentive to deviate. I know that my last move was the best I could have possibly
made in response to how the others were playing, and I know that everyone else is in the
same situation. So if we are asked to play one more time, everyone will be able to
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confidently repeat their previous move, and we will find ourselves in the same Nash
equilibrium.

In a prisoner’s dilemma like game theoretic models it is understood that cooperation

among individuals is not natural as an agent often tries to maximize his profit by
defecting the others. However, the quest for cooperation is as old as evolution itself. At
the dawn of the life on Earth, replicating molecules had to cooperate to take the first step
towards increasing complexity and stability of molecular and later vast multicellular
ecosystems. In the Origin of Species, Darwin noted that natural selection cannot directly
promote altruistic acts where individuals reduce their own competitive ability but
increase that of others. Yet cooperation is abundant in nature. Various explanations have
been given. Let us examine the essence of cooperation which can be captured by the
public-goods game. Each individual of a group can decide whether or not to invest some
money in a common pool. The common pool is increased by some amount and then
equally distributed among all group members regardless of whether or not they made a
contribution. The optimum outcome for the group occurs if everybody cooperates.
However, the temptation is to ‘free ride’: those who don’t contribute (defectors) always
walk away with a higher pay-off than cooperators who do contribute. Therefore, the
tendency of an individual is not to cooperate. Now if everyone does so (defects), no one
will enjoy the public goods. Self-interest is self-defeating! This social dilemma threatens
the success the public enterprises such as social security, the conservation of
environmental resources or group defence against external threats. The oscillations
between cooperation and defection have been there forever.

The Game theory is a fascinating subject and it continues to be one of the most important
ideas of present times coming out of Mathematician’s hand to be applied to Finance,
Strategy making, International relations, Evolutionary Biology, Physics and many other
places. Life is full of games, a wide variety of games.
The real life strategic interactions are far more difficult and we often can not cope with
the complexity of the situation with our deductive and bounded rationality. We adjust our
actions based on what we think other people are going to do and these expectations are
generated endogenously by information about what other people have done in the recent
past. The “El Farol Bar” problem is an example of inductive reasoning with bounded
rationality. In Santa Fe in America, El Farol is a Spanish restaurant where locals love to
hang out. Dancers pack the floors on the weekend nights in summer. This has got
somewhat old Spanish-western charm and one can order Spanish brandies and Sherries
while listening to live flamenco, country, folk or blues. The ‘El Farol Bar’ problem is
posed in the following way: people decide independently each week whether to go to the
bar that offers entertainment on a certain night. Space is limited, and the evening is
enjoyable if things are not too crowded. Therefore, people have two options: either to go
if they expect not many people will turn up or stay back home thinking that it would be
crowded. People do not communicate in this respect and take decisions based upon the
attendances in the past weeks. In effect, people want to be on the minority side. This is a
new direction in the context of game theory which has come to be known as ‘Minority
Game’. This has received attention in terms of understanding the collective behaviour of
agents in a situation where they have to compete through adaptation for a finite resource.
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Application of such a model ranges from Market Economics to Statistical Physics.

Nobel Prize in Economics of this year (2005) to US citizen Thomas Schelling and Israeli
Robert Aumann once again reminds us the profound and increasing impact of the concept
of Game theory to the ideas of modern times. Professor Schelling has specialized in
explaining strategies of international conflict, such as nuclear war. His insightful ideas
formed the theoretical underpinnings for the strategy of nuclear deterrence "and proved
of great relevance for conflict resolution and efforts to avoid war", the Nobel Prize
committee said. Professor Aumann has developed the theoretical underpinnings of
bargaining, co-operation and conflict. Professor Aumann's work has centered on a
question of whether co-operation increases if games are continually repeated.
"Insights into these actions help explain economic conflicts such as price wars and trade
wars, as well as why some communities are more successful than others in managing
common resources," as Nobel citation said.