Game Theory, a segment of economics, can effectively be applied to software development for achieving better financial and decision making outcomes. Delivered on October 13, 2011

1. Game Theoryfor Software Developers
by Matthew McCullough, Ambient Ideas, LLC

2. Matthew McCullough
@matthewmccull

4. The Big Picture

5. 4 Basic Elements
Players
Strategies
Payoffs
Common knowledge

6. Games

7. Business

8. Economics

9. Game theory is...

10. Strategic interactive
decision making

11. Strategy dependent on the
choices of others

12. Economics as science

13. “Good fortune is what
happens when opportunity
meets with planning”
--Thomas Alva Edison

14. The Company

15. MacroCode

16. Consultancy

17. Underbid

19. Signaling

20. Stotting

22. Bid Low for the 1st Month

24. Build the
New Business

25. Decision Tree

26. C:1
Red
1/2
1:1
Raise
2:1
Meet
2 -2
Pass
1 -1
Fold
1 -1
Black
1/2
1:2
Raise
2:1
Meet
-2 2
Pass
1 -1
Fold
-1 1

27. C:1
Red
1/2
1:1
Raise
2:1
Meet
2 -2
Pass
1 -1
Fold
1 -1
Black
1/2
1:2
Raise
2:1
Meet
-2 2
Pass
1 -1
Fold
-1 1

28. C:1
Red
1/2
1:1
Raise
2:1
Meet
2 -2
Pass
1 -1
Fold
1 -1
Black
1/2
1:2
Raise
2:1
Meet
-2 2
Pass
1 -1
Fold
-1 1

29. C:1
Red
1/2
1:1
Raise
2:1
Meet
2 -2
Pass
1 -1
Fold
1 -1
Black
1/2
1:2
Raise
2:1
Meet
-2 2
Pass
1 -1
Fold
-1 1

30. Bounded Rationality

31. Beauty Contest

32. Beauty Contest Rules
Guess between 1 and 100
Winner has the number at 70% of
the average guess

33. University Employees

35. The Red Button

37. The $2 Button: Rules
Gather 100 friends
Everyone starts with a $100 prize
Everyone gets a button
If you push, it deletes $2 from
everyone else's prize
Everyone gets one button push

38. appx. 30% push

39. Worried about
retribution

40. The $2 Button: New Rules
Gather 100 random players
Everyone starts with a $100 prize
Everyone gets a button
If you push, it deletes $2 from
everyone else's prize
Everyone gets one button push
If you push, you cut your losses
in half

41. appx. 70% push

42. Framed as defense

43. Bilateral Anterior
Insular Cortex

45. What if everyone had a meet and
greet in advance?
What if everyone knew each other?
What if everyone was a family
member?
Red Button Coalitions?

46. Hiring

47. Incentives

48. Motivating others to do what
we want them to with rewards

50. Aligning the other player's
desires with ours

52. credible
incredible
vs

53. Big sale, 80% off for a limited
time only!**

55. $20 per resume

58. $1000 if hired

61. One shot?

62. Iterative?

64. Rules

65. Don't push changes
after Thursday

66. Don't disable your
anti-virus software

67. Must have 100%
test coverage

68. Unintended Consequences
Some quantity of rules are what
make a game playable
Don't capriciously create new rules
at the last moment

69. Scoring for the other Team
1994: Barbados vs. Grenada
Must win by 2 goals to advance
B2:G1
Goals count double in overtime
Grenada began defending Barbados'
goal

71. Team Colors

72. Penny Altruism

73. Ultimatum Game

74. Ultimatum Game Rules
The purse is provided by a bank
Players are not allowed to
communicate
There is only one decision to be
made
There are 100 strategies

76. Alice Bob
Bank

77. Ultimatum
Offer 100
Accept
100,0
Decline
0,0
Offer 99 Offer 98 Offer 30 Offer 10
Accept Decline Accept DeclineAccept DeclineAccept Decline
99,1 0,0 0,010,900,030,700,098,2
AliceBob

78. Fair

79. 70/30 split

80. Observed

81. Commission

82. Between ages of 3 & 5

84. Anonymously

86. Offer: 1 to 10

87. No Way Back

90. Strategically
removing options

91. Prisoner's Dilemma

93. Alice Defects Alice Stays Silent
Bob Defects -4,-4 0,-5
Bob Stays Silent -5,0 -1,-1

94. Dev Tests Dev Shirks
QA Tests -1,-1 -1,0
QA Shirks 0,-1 -2,-2

95. Testing

96. Centipede Game

97. 100% Test Coverage

98. Monty Hall

99. Bayes Formula

100. Birthday Attack
With 26 people in the room, what is
the chance that someone has
January 1st as their birthday?

101. Birthday Attack
With 26 people in the room, what is
the chance that any two share a
birthday?

102. Retailer
Selection

103. Red/Black Cards

105. Red/Black Negotiations
23 Red Cards with instructor
23 Cards with students
What kind of deal do you hold out
for?

106. Alice loses three cards

107. Red/Black Negotiations
20 Red Cards with instructor
23 Cards with students
What kind of deal do you hold out
for?

108. Acquisition

109. No!

110. Threat?

111. Commitment

112. Doomsday Device

113. Poison Pill

114. Brinksmanship

115. Chicken

116. What is it?
Playing at high stakes
By not offering any small response,
scaring the other player of the
consequences of the big response

118. Chicken
Best way to play is to throw out the
steering wheel
But the other player must visibly
take notice of that action

120. Partnerships

121. Incremental value

122. Shapley Value

123. Factory

124. Factory Sizes
Small: $60,000
Medium: $90,000
Large: $130,000

125. Advertising

126. Warranty

127. Signaling

128. Quality

129. Lifetime

130. Google Adwords

133. Price

134. Thomas Schelling

135. Schelling points

136. Schelling Points
Grand Central Station in New York
99¢ on the App Store
$39.95 for FPS games
DVD releases on Tuesday
Comic books releases on Wednesday
Theater film releases on Friday

137. How do they occur?
Publicity
Competition
Frequency
Tradition

138. Google

139. Etsy

141. Schelling Number

142. Schelling Number
Write down an two-digit odd
number in which both the digits are
different

143. Vendor Trouble

144. Late

145. Fire them?

146. We need 10 of 12

147. Lemons

148. George Akerlof

149. Balancing Act
PeachesLemons Peaches
Peaches
Pay

150. Balancing Act
PeachesLemons Peaches
Peaches
Pay

151. Balancing Act
Peaches
Lemons
Peaches
Peaches
Pay

152. Balancing Act
PeachesLemons Peaches
Pay

153. Balancing Act
PeachesLemons Peaches
Pay
Lemons

154. Balancing Act
Pay
Peaches
Lemons
Peaches
Lemons

155. Balancing Act
PeachesLemons Peaches
Pay
Lemons

156. Grim Trigger

157. This is going to be
our last project...

158. Alice
Betrays
Alice
Co-operates
Bob
Betrays 5,5 0,5
Bob
Co-operates 5,0 1,1

159. make it sequential

160. Co-operate Co-operate Co-operate Co-operate Co-operate Co-operate Co-operate Co-operate

161. Co-operate Co-operate Co-operate Co-operate Co-operate Co-operate Co-operate Betray

162. Co-operate Co-operate Co-operate Co-operate Co-operate Co-operate Betray

163. Co-operate Co-operate Co-operate Co-operate Co-operate Betray

164. Co-operate Co-operate Co-operate Co-operate Betray

165. Co-operate Co-operate Co-operate Betray

166. Co-operate Co-operate Betray

167. Co-operate Betray

168. Betray

169. Simultaneous Shoe Bidding

170. What would you bid
for this pair of shoes?

171. What would you bid
if you only had a
50% chance of
getting the other
shoe?

173. XKCD 601: Game Theory

174. Game Theoryfor Software Developers
by Matthew McCullough, Ambient Ideas, LLC

175. References: Software
Gambit
http://www.gambit-project.org/doc/index.html
http://www.gambit-project.org/doc/samples.html
Game Theory Explorer
http://gametheoryexplorer.appspot.com/builder/

176. References: Research
The Teaching Company: Game Theory Video Course
http://www.thegreatcourses.com/tgc/courses/Course_Detail.aspx?cid=1426
Professor Scott P. Stevens, Ph.D.
The Pennsylvania State University
James Madison University
Bookmarks
http://www.delicious.com/matthew.mccullough/gametheory
Range Voting
http://rangevoting.org/TBlecture.html
Market for Lemons
http://en.wikipedia.org/wiki/Market_for_lemons
http://nobelprize.org/nobel_prizes/economics/laureates/2001/akerlof-article.html
http://www.springerlink.com/content/h3h8530156276515/
http://hydrogen.its.ucdavis.edu/eec/education/EEC-classes/eeclimate/class-
readings/akerlof-the%20market%20for%20lemons.pdf

177. References: Blogs
Mind Your Decisions
http://mindyourdecisions.com/blog/
Game Theory Strategies
http://www.gametheorystrategies.com/
Twitter, Barry Hughes
https://twitter.com/#!/gamethry

178. References: Books
Theory of Games and Economic Behavior
http://en.wikipedia.org/wiki/Theory_of_Games_and_Economic_Behavior
http://press.princeton.edu/titles/7802.html
http://www.amazon.com/Economic-Behavior-Commemorative-Princeton-Editions/
dp/0691130612/ref=sr_1_1?ie=UTF8&qid=1310015156&sr=8-1
Rock, Paper, Scissors: Game Theory in Everyday Life
http://www.amazon.com/Rock-Paper-Scissors-Theory-Everyday/dp/0465009387/
ref=sr_1_2?ie=UTF8&qid=1310490759&sr=8-2
The Art of Strategy: A Game Theorist's Guide to Success in Business and Life
http://www.amazon.com/Art-Strategy-Theorists-Success-Business/dp/0393337170/
ref=pd_bxgy_b_text_c
Co-Opetition : A Revolution Mindset That Combines Competition and Cooperation :
The Game Theory Strategy That's Changing the Game of Business
http://www.amazon.com/Co-Opetition-Revolution-Combines-Competition-
Cooperation/dp/0385479506/ref=pd_sim_b_1

179. References: People
John von Neumann
http://en.wikipedia.org/wiki/John_von_neumann
Thomas Schelling
http://en.wikipedia.org/wiki/Thomas_Schelling
John Forbes Nash
http://en.wikipedia.org/wiki/John_Forbes_Nash
John Harsanyi
http://en.wikipedia.org/wiki/John_Harsanyi

180. Photo Credits
100 Dollar Bill Roll
http://www.flickr.com/photos/85473033@N00/3367543296
Pennies
http://flic.kr/p/6ucLDE
http://flic.kr/p/6u8BEa
Earth
http://flic.kr/p/9DTDXi
Dice
http://flic.kr/p/9g1aZc
Cards
http://flic.kr/p/4UwZc6
http://flic.kr/p/6FKnGu
http://flic.kr/p/4V67rx
Happy Hour
http://www.flickr.com/photos/beleaveme/3276175127/
Prison
http://flic.kr/p/38wBWq

181. Other Ideas
Bounded Rationality
2-3 event horizon
Typing
Pooling or separating equilibria
Prisoner's Dilemma with an Arbiter
Tragedy of the Commons
Air pollution
Mass transit tickets
Overfishing
Volunteer's Dilemma
Witnessing a crime