cheap talk. when can cheap talk be believed? we have discussed costly signaling models like...

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Cheap Talk Slide 2 When can cheap talk be believed? We have discussed costly signaling models like educational signaling. In these models, a signal of ones type is credible if the cost of a signal differs between types and it doesnt pay to send a false signal. But what can be learned if there is no cost to anyone from sending a signal. When will senders tell the truth and receivers believe what they are told? Slide 3 Signaling intent Consider a simultaneous game in which one or more players are allowed to say how they are going to play. Will they tell the truth? Will others pay attention to what they say? Slide 4 Example: In Rock, Paper, Scissors, Bart gets to say what he is going to do on the next play, then gets to choose what to do. What would Bart do? How would Lisa respond? Slide 5 Babbling Equilibrium Message sender sends a completely uninformative message. Receiver ignores it. In a pure conflict game, like RPS, this is the only equilibrium. If senders signal was at all informative, it would be used to his disadvantage. Slide 6 Common interest games In some games, the players have a common interest. If Player A gets a higher payoff when Player B knows how he will move than when Player B does not, it is in the interest of A to correctly inform B of what he will do and in the interest of B to believe A. Slide 7 Dressing for the ball Slide 8 The story Players are the Countess and the Duchess They are going to a formal ball. Each has two favorite dresses, a red dress or a blue dress. Problem is they use the same designer. Their red dresses are identical and so are their blues. Both would be humiliated if they wore identical dresses. Slide 9 A common interest game: Dressing for the Ball Red DressBlue Dress Red Dress -10, -1020, 20 Blue Dress 20, 20-10,-10 Duchess Countess Slide 10 Nash equilibrium There are two asymmetric equilibria in pure strategies. But if they play only once, how do they find it? For single shot play, symmetric equilibrium seems more likely. Lets look for a symmetric Nash equilibrium in mixed strategies. Slide 11 If the countess wears a red dress with probability , the best response for the duchess is to wear a red dress with probability: A)1/4 B)3/4 C)1/2 D)0 Red DressBlue Dress Red Dress -10, -1020, 20 Blue Dress 20, 20-10,-10 Slide 12 Symmetric equilibrium? There is a symmetric Nash equilibrium in which duchess and countess each play the mixed strategy wear a red dress with probability p A) For any p less than 1/2 B) For any p greater than 1/2 C) Only if p=1/2 D) Only if p=0 E) Either if p=1 or p=0. Slide 13 What is the expected payoff to each player if each flips a fair coin to decide the color of her dress? A)15 B)5 C)12.5 D)10 E) -5 Red DressBlue Dress Red Dress -10, -1020, 20 Blue Dress 20, 20-10,-10 Slide 14 How about messages? What do you think would happen if only the Countess can send a message? Countess decides what color to say shes wearing and also what she does wear. Duchess hears Countesss message and decides what to wear. Slide 15 Possible Pure Strategies For Countess: Say Red, Wear Red Say Red, Wear Blue Say Blue, Wear Red Say Blue, Wear Blue For Duchess: Wear Blue if C says Red, Red if C says Blue Wear Blue if C says Red, Blue if C says Blue Wear Red if C says Red, Blue if C says Blue Wear Red if C says Red, Red if C says Blue Slide 16 Suggested exercise Draw an extensive form representation of this game Write out the strategic form and find subgame perfect Nash equilibria. Slide 17 A Nash equilibria Countess plays: Say Ill wear Red and she wears Red Duchess plays: wear Blue if C says Ill wear Red, and wear Red if C says Ill wear Blue. Show that this is a N.E. What other Nash equilibria can you find? Slide 18 Another Nash equilibrium Countess says Ill wear red, then flips a coin to decide what to wear. Duchess pays no attention to what Countess says, flips a coin herself. This kind of equilibrium is known as a babbling equilibrium. Slide 19 An eccentric Nash equilibrium Duchess says Ill wear red, then wears blue. Countess plays Wear color that Duchess claims she will wear. This is an equilibrium. Duchess always lies Countess believes that duchess will lie and acts accordingly. What does it mean when Duchess says Red? Slide 20 Simultaneous messages Why should one of them get to move first? Suppose that the duchess and the countess each get to send one message to the other. Neither knows what the others message says when she sends hers. Slide 21 Single messages sent simultaneously A symmetric Nash equilibrium: Each flips a coin and tells the other I will wear red or I will wear blue with probability . If they each said a different color, they wear what they said they would. If they said the same color, they each toss a coin to decide what to wear. Check that this is a Nash equilibrium Slide 22 If they each use the single message strategy discussed in previous slide, what is the probability that they wear different colors to the ball? A) B)1 C) D) E) 2/3 Slide 23 A second message? Suppose that if they say same color on first message, they get a chance to send a second message in an attempt to coordinate. What would a symmetric equilibrium look like? What would be the chances of wearing different dresses? Slide 24 Conflicting Interests Dressing for the Ball Red DressBlue Dress Red Dress 10, -100, 10 Blue Dress 0, 1010,-10 Duchess Social Climber What are the equilibria if there is no pre- ball communication? Slide 25 One player sends signal Suppose Duchess sends a message to the social climber saying what she will wear. Can the duchess gain by lying? What will the social climber make of what she says? Is any informative message an equilibrium? What about babbling? Slide 26 Partially Conflicting Interests Red preferred Red DressBlue Dress Red Dress -10, -1020, 0 Blue Dress 0, 20-10,-10 Duchess Countess What is the mixed strategy equilibrium if there is no pre-ball communication? Slide 27 Finding symmetric mixed equilibrium Payoff to countess if duchess wears red with probability p Wearing red: -10p+20(1-p)=20-30p Wearing blue 0p-10(1-p)= 10p-10 Countess will mix if 20-30p= 10p-10, so p=3/4. By symmetry, each will mix if the other wears red with probability . In this equilibrium, each gets a payoff of 10p-10= -2.5 Slide 28 Simultaneous message case Suppose each sends a message, Red or Blue. If messages are different, each wears what she said If messages are the same, each wears red with probability . Slide 29 Strategic form with one round of talk Say RedSay Blue Say Red-2.5, -2.520, 0 Say Blue0, 20-2.5,-2.5 Expected payoffs to countess if duchess says red with probability p, Say red -2.5p+20(1-p)=20-22.5p Say blue 0p-2.5(1-p)= 2.5p-2.5 These are equal when 20-22.5p= 2.5p-2.5 or 25p=22.5, which implies p=9/10. Slide 30 Alice and Bob without talk Bob Go to AGo to B Go to A Alice Go to B Go to A Go to B 2323 0000 1111 3232 Slide 31 Alice and Bob Go to Movie AGo to Movie B Go to Movie A3,21,1 Go to Movie B0,02,3 Alice Bob Mixed strategy equilibrium: Alice goes to A with probability p such that 2p= p+3(1-p), so p=3/4. Similar reasoning finds Bob goes to B with probability 3/4 Slide 32 Nash equilibrium Mixed strategy equilibrium. Bob goes to B with p=3/4, Alice goes to A with probability 3/4. Probabilities: Meet at A 3/16: Meet at B 3/16 Probability they find each other is only 3/8. Expected payoff to each is (3/16)3+(3/16)2+ (9/16)1+(1/16)0=3/2 Slide 33 Talking it over Suppose Bob gets to say where he is going and Alice doesnt get to say anything. What do you think would be an equilibrium? Slide 34 Two-way conversation, single message Each gets to send the other a single message, suggesting which movie to go to, then decide where to go. Suggested equiibrium: If both say same movie, they both go there. If they name different movies, they play original mixed strategy game. Draw extensive form tree. Slide 35 Game of simultaneous messages Pure strategies, at first decision node Say I am going to A Say I am going to B After hearing other persons message (and ones own) go to one movie or the other. Sample strategy for Bob Say A, If Alice says A, go to A. If Alice says B, go to to B with probability . Slide 36 A Nash equilibrium in mixed strategies With probability p, say I am going to A and with probability (1-p) say I am going to B. If both say they are going to same place, they both go there. If they say different things, they ignore the conversation and play mixed strategy for which movie to attend. Slide 37 Talking game: Abbreviated payoff matrix Say Movie ASay Movie B Say Movie A3, 23/2,3/2 Say Movie B3/2,3/22,3 Alice Bob If both say same movie, they both go there. If they say different movies, They play original mixed strategy game. Slide 38 Mixed strategy equilibrium for this game If Alice says Movie A with probability p, Then Bobs payoff from saying movie A is 2p+(3/2)(1-p) and his payoff from saying Movie B is 3(1-p)+(3/2)p. These are equal if 3/2+1/2p=3-(3/2)p, which implies p=3/4. Alice Bob Slide 39 Payoffs With probability 3/16, they both say A and go to A with probability 3/16, they both say B and go to B. With probability 10/16, they say different things from each other and play original mixed strategy equilibrium. Expected payoffs :3(3/16)+2(3/16)+1.5(10/16)=15/8>3/2. Slide 40 Mixed strategy equilibrium for Talking Game If Bob says movie A with probability q, when will Alice be willing to use a mixed strategy? Her expected payoff from saying Movie A is 3q+3/2(1-q) and her expected payoff from saying B is 3/2q+2(1-q). These are equalized when q=1/4. In a mixed strategy equilibrium, Bob says A with probability and B with probability . Symmetric argument shows that Alice says A with probability and B with probability . Probability they both say the same thing is therefore 3/16+3/16=3/8. Slide 41 What is probability they get together? With probability 3/8, they agree on where to go. If they dont

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