Traveler's dilemma

In game theory, the traveler's dilemma (sometimes abbreviated TD) is a type of non-zero-sum game in which two players attempt to maximize their own payoff, without any concern for the other player's payoff.

The game was formulated in 1994 by Kaushik Basu and goes as follows:

An airline loses two suitcases belonging to two different travelers. Both suitcases happen to be identical and contain identical antiques. An airline manager tasked to settle the claims of both travelers explains that the airline is liable for a maximum of $100 per suitcase—he is unable to find out directly the price of the antiques.

To determine an honest appraised value of the antiques, the manager separates both travelers so they can't confer, and asks them to write down the amount of their value at no less than $2 and no larger than $100. He also tells them that if both write down the same number, he will treat that number as the true dollar value of both suitcases and reimburse both travelers that amount. However, if one writes down a smaller number than the other, this smaller number will be taken as the true dollar value, and both travelers will receive that amount along with a bonus/malus: $2 extra will be paid to the traveler who wrote down the lower value and a $2 deduction will be taken from the person who wrote down the higher amount. The challenge is: what strategy should both travelers follow to decide the value they should write down?

One might expect a traveler's optimum choice to be $100; that is, the traveler values the antiques at the airline manager's maximum allowed price. Remarkably, and, to many, counter-intuitively, the Nash equilibrium solution is in fact just $2; that is, the traveler values the antiques at the airline manager's minimum allowed price.

For an understanding of why $2 is the Nash equilibrium consider the following proof:

Another proof goes as follows:

The ($2, $2) outcome in this instance is the Nash equilibrium of the game. By definition this means that if your opponent chooses this Nash equilibrium value then your best choice is that Nash equilibrium value of $2. This will not be the optimum choice if there is a chance of your opponent choosing a higher value than $2. When the game is played experimentally, most participants select a value higher than the Nash equilibrium and closer to $100 (corresponding to the Pareto optimal solution). More precisely, the Nash equilibrium strategy solution proved to be a bad predictor of people’s behavior in a traveler's dilemma with small bonus/malus and a rather good predictor if the bonus/malus parameter was big.

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