This should already perplex the reader who believes that rationalists should win

But see:

Assume maximal selfishness: each agent is motivated solely to maximize its own number of children (the agent itself doesn't get returned!), and doesn't care about the other agents using the same decision theory

If that wasn't stipulated, one could look ahead and see by acting like a defectbot you could tie, and self-modify into a defectbot/imitate a defectbot. Rationalists win provided rationalists don't mind others doing even better.

Likewise:

The setup looks perfectly fair for TDT agents. So why do they lose?

Because they only think one step ahead.