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I am not the right person to write about Lloyd Shapley. I think I only saw him once, in the first stony brook conference I attended. He reminded me of Doc Brown from Back to The Future, but I am not really sure why. Here are links to posts in The Economist and NYT following his death.

Shapley got the Nobel in 2012 and according to Robert Aumann deserved to get it right with Nash. Shapley himself however was not completely on board: “I consider myself a mathematician and the award is for economics. I never, never in my life took a course in economics.” If you are wondering what he means by “a mathematician” read the following quote, from the last paragraph of his stable matching paper with David Gale

The argument is carried out not in mathematical symbols but in ordinary English; there are no obscure or technical terms. Knowledge of calculus is not presupposed. In fact, one hardly needs to know how to count. Yet any mathematician will immediately recognize the argument as mathematical…

What, then, to raise the old question once more, is mathematics? The answer, it appears, is that any argument which is carried out with sufficient precision is mathematical

In the paper Gale and Shapley considered a problem of matching (or assignment as they called it) of applicants to colleges, where each applicant has his own preference over colleges and each college has its preference over applicants. Moreover, each college has a quota. Here is the definition of stability, taken from the original paper

Definition: An assignment of applicants to colleges will be called unstable if there are two applicants and who are assigned to colleges and , respectively, although prefers to and prefers to .

According to the Gale-Shapley algorithm, applicants apply to colleges sequentially following their preferences. A college with quota maintains a `waiting list’ of size with the top applicants that has applied to it so far, and rejects all other applicants. When an applicant is rejected from a college he applies to his next favorite college. Gale and Shapley proved that the algorithm terminates with a stable assignment.

One reason that the paper was so successful is that the Gale Shapley method is actually used in practice. (A famous example is the national resident program that assigns budding physicians to hospitals). From theoretical perspective my favorite follow-up is a paper of Dubins and Freedman “Machiavelli and the Gale-Shapley Algorithm” (1981): Suppose that some applicant, Machiavelli, decides to `cheat’ and apply to colleges in different order than his true ranking. Can Machiavelli improves his position in the assignment produced by the algorithm ? Dubins and Freedman prove that the answer to this question is no.

Shapley’s contribution to game theory is too vast to mention in a single post. Since I mainly want to say something about his mathematics let me mention Shapley-Folkman-Starr Lemma, a kind of discrete analogue of Lyapunov’s theorem on the range of non-atomic vector measures, and KKMS Lemma which I still don’t understand its meaning but it has something to do with fixed points and Yaron and I have used it in our paper about rental harmony.

I am going to talk in more details about stochasic games, introduced by Shapley in 1953, since this area has been flourishing recently with some really big developments. A (two-player, zero-sum) stochastic game is given by a finite set of states, finite set of actions for the players, a period payoff function , a distribution over for every state and actions , and a discount factor . At every period the system is at some state , players choose actions simultaneously and independently. Then the column player pays to the row player. The game then moves to a new state in the next period, randomized according to . Players evaluate their infinite stream of payoofs via the discount factor . The model is a generalization of the single player dynamic programming model which was studied by Blackwell and Bellman. Shapley proved that every zero-sum stochastic game admits a value, by imitating the familiar single player argument, which have been the joy and pride of macroeconomists ever since Lucas asset pricing model (think Bellman Equation and the contraction operators). Fink later proved using similar ideas that non-zero sum discounted stochastic games admit perfect markov equilibria.

A major question, following a similar question in the single player setup, is the limit behavior of the value and the optimal strategies when players become more patient (i.e., goes to ). Mertens and Neyman have proved that the limit exists, and moreover that for every there strategies which are -optimal for sufficiently large discount factor. Whether a similar result holds for Nash equilibrium in -player stochastic games is probably the most important open question in game theory. Another important question is whether the limit of the value exists for zero-sum games in which the state is not observed by both players. Bruno Zilloto has recently answered this question by providing a counter-example. I should probably warn that you need to know how to count and also some calculus to follow up this literature. Bruno Zilloto will give the Shapley Lecture in Games2016 in Maastricht. Congrats, Bruno ! and thanks to Shapley for leaving us with some much stuff to play with !

Among game theoretic concepts, mixed strategy is arguably the most difficult to digest. We don’t see people tossing coins all the time, and it’s difficult to justify rational decision as based on Lady Fortuna’s unpredictable caprices. The case of Nash Equilibrium is especially disturbing — if you are indifferent between a couple of strategies then why bother randomizing between them according to the mixture prescribed by the equilibrium. Just pick one of these strategies arbitrary and get it over with.

I know of two types of answers that game theory gives for this conundrum. One, which may be called `interpretation of mixed strategies’ is arguing that the mixed strategies in Nash equilibrium do not reflect an actual randomization performed by the players: Epistemic game theory interprets mixed strategies as opponent’s beliefs about a player’s (non-randomized) strategy; Harsanyi’s Purification approach embeds a normal form game in a larger game with incomplete information and pure equilibrium. The other type of answers is identifying classes of games which admit pure equilibrium, such as games with strategic complementarity and potential games.

In my new paper with Yaron(pdf) we suggest another class of games which admit pure -equilibrium, which means that no player gains more than from deviating. These are games in which a player’s payoff does not change much if one of her opponents changes his strategy:

Math and open problems below the fold…

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