Battle of The Sexes (game Theory) - Burning Money

Burning Money

Interesting strategic changes can take place in this game if one allows one player the option of "burning money" – that is, allowing that player to destroy some of her utility. Consider the version of Battle of the Sexes pictured here (called Unburned). Before making the decision the row player can, in view of the column player, choose to set fire to 2 points making the game Burned pictured to the right. This results in a game with four strategies for each player. The row player can choose to burn or not burn the money and also choose to play Opera or Football. The column player observes whether or not the row player burns and then chooses either to play Opera or Football.

If one iteratively deletes weakly dominated strategies then one arrives at a unique solution where the row player does not burn the money and plays Opera and where the column player plays Opera. The odd thing about this result is that by simply having the opportunity to burn money (but not actually using it), the row player is able to secure her favored equilibrium. The reasoning that results in this conclusion is known as forward induction and is somewhat controversial. For a detailed explanation, see p8 Section 4.5. In brief, by choosing not to burn money, the player is indicating she expects an outcome that is better than any of the outcomes available in the "burned" version, and this conveys information to the other party about which branch she will take.