Game theory in the news–the financial crisis, Macs and viruses, the bus-wait formula, and more…

[Update: Welcome readers from Simoleon Sense]

I’m on vacation through the end of the year so I’m mixing things up. I’ve been seeing a lot of good articles on the web about game theory and want to share them with you. Enjoy and happy holidays.

(If you’re looking for more to read, check out the game theory archive which now has 70+ articles.)

The financial crisis (game of chicken, tragedy of the commons)

Chuck Prince Dances, Banks Play Chicken: Game Theory for Crisis

When John Q. Public views the credit crisis, he sees pinstriped bankers getting bailouts and the worst global stock-market slump in more than three decades. Len Fisher sees a game of chicken, an overgrazed pasture, and bankers lighting their own gray trousers on fire.

Fisher, an affable scientist who splits his time between Australia and the U.K., specializes in explaining abstruse concepts in pop titles such as “How to Dunk a Doughnut.” What connects the chicken, the pasture and the liar-liar-pants-on-fire is game theory, a branch of mathematics explored in his spunky new book, “Rock, Paper, Scissors.”

Madoff’s Ponzi Scheme (Prisoner’s dilemma and games of coordination)

Madoff’s Willing Partners

The facts should have been enough to make anyone suspicious. Madoff’s accounts were only perfunctorily audited, and his statements were printed with a dot-matrix printer on lightweight copier paper. Above all, his business returns were consistently good — too good — and he never reported a down month, let alone a down quarter or year. Let’s be honest; such oddities had to have set off alarm bells. So why did so many professionals continue to invest with him?

Only one answer makes sense. Some of those investors must have suspected that he was a cheat but continued to invest because they thought they were benefiting from that cheating.

Financial takeovers (games of threats, brinkmanship)

Would Yahoo! have Swallowed the Poison Pill?

We recently saw that Yahoo had removed the so called “Severance Benefits” that it had planned to implement were it ever subject to a hostile takeover. In this article, we take a closer look at this mechanism as well as how effective “Poison Pills” like this can be.

Why you should avoid swoopo.com (it’s like the dollar auction game)

Profitable Until Deemed Illegal

I was fascinated to discover the auction hybrid site swoopo.com (previously known as telebid.com). It’s a strange combination of eBay, woot, and slot machine. Here’s how it works:

* You purchase bids in pre-packaged blocks of at least 30. Each bid costs you 75 cents, with no volume discount.
* Each bid raises the purchase price by 15 cents and increases the auction time by 15 seconds.
* Once the auction ends, you pay the final price.

I just watched an 8GB Apple iPod Touch sell on swoopo for $187.65. The final price means a total of 1,251 bids were placed for this item, costing bidders a grand total of $938.25.

So that $229 item ultimately sold for $1,125.90.

But that one final bidder got a great deal, right? Maybe. Even when you win, you can lose.

Also see:

An All-Pay Auction

What starts off as a feel-good exercise to take advantage of a generous professorial offer suddenly becomes a sickening war of attrition, where the last two bidders pay more than what the prize is worth. These games routinely end with the winning bid being 50 percent higher than the value of the prize. Since both the highest and second-highest bidders pay, this means that the professor rakes in about three times the amount being auctioned.

This is an example of what auction theorists call an “all-pay” auction, and it’s a game you want to avoid playing if you possibly can.

But Barry Nalebuff pointed me toward a scary website — called swoopo.com — that seems to be exploiting the low-price allure of all-pay auctions. And it seems to be working.

(Thanks Kristjan, Roscoe, and Kyle for the links)

The HPV vaccine for cervical cancer (a game of incomplete information and signaling)

Fears of Promiscuity Pose Barrier to Cervical Cancer Vaccinations

There is an ongoing public health campaign promoting the vaccination of girls against HPV to prevent against genital warts and cervical cancer, but the Yale study showed the public believes that the benefits are outweighed by potential disadvantages. The Yale researchers–Sanjay Basu, a Ph.D. candidate, and Alison Galvani, assistant professor in the Division of Epidemiology of Microbial Diseases– studied how concerns about adolescent promiscuity and everyday economics lead many parents and guardians to not have their children treated.

The vast majority of those surveyed believed the risk of cervical cancer and genital warts (which are largely spread through sexual contact) is far lower with the HPV vaccine. But the same group of 326 adults in the United States also thought adolescent sexual activity would nearly double among those receiving the vaccine. Concern about increased promiscuity was the single biggest factor in the decision not to vaccinate, according to the study.

Bipartisanship and strategy (coalitional game theory and the theory of voting)

Isn’t it Grand

Typically, there is too much bad blood, ideological division and competition between the parties who compete to govern for them to join together.

In addition, it is rare that they need to join together. For instance, right now the Conservatives could govern with the support of any one of the three opposition parties, or even with just nine MPs from any party voting with the government.

But the principle driving factor–according to proponents of game theory and students of politics–the theory of minimal winning coalitions.

Macs and malware/viruses (tipping point…for a similar example, see racism and game theory)

When Malware Attacks (Anything but Windows)

Where is all the Macintosh malware? In a time when it would be conservative to say that one-quarter of all Internet-connected client PCs are compromised, it’s curious that we’ve seen so little malware on Macs. Apple has highlighted its supposed invulnerability to viruses in various marketing campaigns, and for good reason. According to F-Secure, more than 250,000 new pieces of Windows malware were identified in 2007, and, if current trends continue, we are set for another 500,000 to appear by the end of 2008 (www.f-secure.com/2007/2/index.html). Meanwhile, the number of total pieces of Mac malware is rumored to be less than .1% of that total, with the majority of that total appearing only last year.

Here, I introduce a model based on game theory for predicting if, and when, Mac malware will arise based on a reasonable number of measurable parameters. But first, let’s review a few theories on how Macs have been able to avoid malware.

Game theory and test-taking (game of expectations)

The Art of SATergy

My son took the SSAT exam this past Saturday. And while I was sitting in the Choate athletic facility waiting for him to finish, I remembered that Avinash Dixit and Barry Nalebuff’s new book, The Art of Strategy, has a great example concerning standardized testing. Game theory is so powerful it can help you figure out the correct answer without even knowing what the question is.

Consider the following question for the GMAT (the test given to MBA applicants). Unfortunately, issues of copyright clearance have prevented us from reproducing the question, but that shouldn’t stop us.

Which of the following is the correct answer? [analysis follows]

Fish and game theory (game of cooperation..has to do with fair division)

Take ‘em to the cleaners!

Wrasses are a family of bright coloured, smaller, marine fish that are marked by a jaw structure with separate jaw teeth that jut out. A group of them are the cleaner wrasses which provide a service to other fish by feeding on parasites and dead tissue in the clients’ mouths and gill cavities. Client fish are known to seek places where wrasses congregate, to seek “˜cleaner service’ and predator fish leave wrasses alone because of the latter’s value as cleaners. But the cleaners are not entirely benevolent, they also like to snatch a bit of healthy tissue and mucous, which is an extra charge the clients usually do not agree to pay! When a client fish is being cleaned by wrasses, it patiently allows its parasites and scales to be cleaned, till the cleaner takes a nip at healthy tissue. The client discourages this behaviour usually by swimming away, so that the feeding session ends for the cleaner. How soon a cleaner is likely to chance a “cheating bite” and whether a cleaner behaves differently when working with a partner can be matters of mathematical study.

The Bus-wait formula (an overly scientific way to analyze a common situation…like how to find true love)

Bus-wait Formula, The

You arrive at the bus stop to catch the ride to work, but the bus isn’t there. Your destination isn’t very far, so you think, Hmm, maybe I should just walk. But then you might find yourself halfway between stops when the bus whips past, which would be deeply annoying. What to do? Should you walk or should you wait?

This question has plagued commuters for years, but this year three undergraduate students at Harvard and Cal Tech decided to resolve it.

(Update: see the original research paper)