Two-person second-order games. I: Formulation and transition anatomy (Q1035877)

This paper considers non-cooperative games and takes into account human psychology when such a games are formulated. Prisoner's dilemma and other games are used to illustrate the importance of psychological aspects in games. They briefly introduce the habitual domain theory [\textit{P. L. Yu}, Habitual domains and forming win-win strategies, NCTU Press, Hshinchu (2002)] that is related with the ideas and actions in our brain joint with experience and knowledge. Basic elements of this theory are presented as well the main hypotheses that describe the brain and the mind functions. Most aspects of such hypotheses are not considered in traditional game theory which therefore can not capture several important psychological aspects. The first examples are revisited by considering the habitual domain theory and also, in general, two-person games are formulated in terms of this theory obtaining the so-called second-order game. States of mind of each player at each time are key elements of this formulation that is done as a Markov chain that uses a finite number of states and the corresponding transition probabilities with the Markov property which are evaluated in a subjective way or by frequency approach. So-called focal profiles are such that they are desirable to reach due to equity, fairness or collective interest among other reasons. Win-win profiles are absorbing focal profiles and the question is when it is possible and how to reach focal profiles and how to make them win-win profiles. It is remarked that in traditional games, Nash equilibrium is based on strategies and it does not exist in most of the games. Win-win profiles are based on states of mind. Other differences between normal form games and second-order games are given. Differences with stochastic games [cf. \textit{L. S. Shapley}, Proc. Natl. Acad. Sci. USA 39, 1095--1100 (1953; Zbl 0051.35805)] and fuzzy games [cf. \textit{D. Butnariu}, Fuzzy Sets Syst. 1, 181--192 (1978; Zbl 0389.90100)] are also indicated. Again, prisoner's dilemma and other examples illustrate how the second-order game is constructed. To facilitate the presentation, some basic results of finite Markov chain theory are presented. This is used to study conditions under which the focal profile will be reached, cases where the focal profile may not be reached, the average number of steps for reaching the focal profile, and the reduction of the expected number of steps needed to reach the focal point changing some relevants entries in \(P\), the transition probability matrix of the Markov chain of the game. The example of prisoner's dilemma illustrates the results.