Storytelling 277 Exam

Edward Burdette
STORYTELLING
STORYTELLING_277_EXAM
In game theory, a focal point (or Schelling point) is a solution that people tend to choose by
default in the absence of communication in order to avoid coordination failure.The concept
was introduced by the American economist Thomas Schelling in his book The Strategy of
Conflict (1960).Schelling states that "[p]eople can often concert their intentions or
expectations with others if each knows that the other is trying to do the same" in a
cooperative situation (p. 57), so their action would converge on a focal point which has
some kind of prominence compared with the environment.However, the conspicuousness of
the focal point depends on time, place and people themselves.It may not be a definite
solution.== Existence ==
The existence of the focal point is first demonstrated by Schelling with a series of
questions.Here is one example: to determine the time and place to meet a stranger in New
York City, but without being able to communicate in person beforehand.In this coordination
game, any place and time in the city could be an equilibrium solution.Schelling asked a
group of students this question, and found the most common answer was "noon at (the
information booth at) Grand Central Terminal".There is nothing that makes Grand Central
Terminal a location with a higher payoff because people could just as easily meet at another
public location, such as a bar or a library, but its tradition as a meeting place raises its
salience and therefore makes it a natural "focal point".Later, Schelling's informal
experiments have been replicated under controlled conditions with monetary incentives by
Judith Mehta.The existence of focal points can help explain the use of social norms,
including traditional gender roles, in order to ensure coordination, and why changing said
norms can be difficult.== Theories ==
Although the concept of a focal point has been widely accepted in game theory, it is still
unclear how a focal point forms.The researchers have proposed theories from two
aspects.=== The level-n theory ===
Stahl and Wilson argue that a focal point is formed because players would try to predict
how other players act.They model the level of "rational expectation" players by their ability
to
form priors (models) about the behavior of other players;
choose the best responses given these priors.A level-0 player will choose actions regardless
of the actions of other players.A level-1 player believes that all other players are level-0
types.A level-n player estimates that all other players are level-0, 1, 2, ..., n-1 types.Based on
experimental data, most of the players only use one model to predict the behavior of all the
other players.Although the hierarchy of types could be indefinite, the benefits of higher
levels would decrease substantially while incurring a much greater cost.Because of the limit
of players' expectation level and players' priors, it is possible to reach an equilibrium in
games without communication.==== The cognitive hierarchy theory ====
The cognitive hierarchy (CH) theory is a derivation of level-n theory.A level-n player from
the CH model would assume that their strategy is the most sophisticated and that the levels
0, 1, 2, ..., n-1 on which their opponents play follow a normalized Poisson distribution.This
model works well in multi-player games where the players need to estimate a number in a
given range, such as the Guess 2/3 of the average game.A player would be able to determine
the value which they should play based on the assumed distribution of lower-level players
described by the Poisson distribution.Another example of a game involving CH theory is the

Keynesian beauty contest.=== The team reasoning ===
Bacharach argued that people could find a focal point because they act as members of a
team instead of individuals in a cooperative game.With the identity changed, the player
follows the prescription of an imaginary group leader to maximize the group interest.==
Examples ==
=== Schelling's questions ===
Here is a subset of the questions raised by Schelling to prove the existence of a focal
point.Head-tail game: Name "heads" or "tails".If the two players name the same, they win an
award, otherwise, they get nothing.Letter order game: Give an order to letters A, B, and C. If
the three players give the same order, they win an award, otherwise they get nothing.Split
money game: Two players share $100.They first write down their individual claims on a
sheet of paper.If their claims add to $100 or less, both of them will get exactly what they
claimed, but if the sum is higher than $100 they get nothing.The results of the informal
experiments are
For the two players, A and B, in head-tail game.16 out of 22 A and 15 out of 22 B chose
"heads".For the three players, A, B, and C, in letter order game.9 out of 12 A, 10 out of 12 B,
and 14 out of 16 C wrote "ABC".For the players to claim part of the $100.36 out of 40 chose
$50.2 of the remainder chose $49 and $49.99.These games suggest that focal points have
some saliency.These characteristics make them preferable choices to people.Furthermore,
people would assume each other has also noticed the saliency and make the same
decision.=== In coordination game ===

In a simple example, two people unable to communicate with each other are each shown a
panel of four squares and asked to select one; if and only if they both select the same one,
they will each receive a prize.

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Edward Burdette

default in the absence of communication in order to avoid coordination failure.The concept

some kind of prominence compared with the environment.However, the conspicuousness of

salience and therefore makes it a natural "focal point".Later, Schelling's informal

norms can be difficult.== Theories ==

aspects.=== The level-n theory ===

form priors (models) about the behavior of other players;

of players' expectation level and players' priors, it is possible to reach an equilibrium in

games without communication.==== The cognitive hierarchy theory ====

described by the Poisson distribution.Another example of a game involving CH theory is the

=== Schelling's questions ===

some saliency.These characteristics make them preferable choices to people.Furthermore,

decision.=== In coordination game ===

they will each receive a prize.

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