Game Theory

Quantitative Analysis for Decision Making

M.Ghotbi M.Pajhouh Niya

Abbas Keramati ( Assistant Professor) University of Tehran MBA Fall 2008

Outline
What is Game Theory? History of Game Theory Title Applications of Game Theory Lorem ipsum dolor of a game Key Elements sit amet, consectetuer adipiscing elit.of games et magna. Fusce sed Types Vivamus sem sed magna suscipit egestas. Nash Equilibrium (NE) Lorem ipsum dolor sitMixed Strategies Pure Strategies & amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed 2players Zero-Sum games

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What is Game Theory?

Title
ipsum dolor sit amet, consectetuer Lorem In strategic games, agents choose strategies that will Vivamus et return, Fusce adipiscing elit. maximize theirmagna.given thesed strategies the other agents choose. sem sed magna suscipit egestas. DGDG Lorem ipsum dolor sit amet, consectetuer The mathematics of human interactions adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas.

History of Game Theory

von Neumann wrote a key paper in 1928 Title and Economic 1944: Theory of Games Behavior by von Neumann consectetuer Lorem ipsum dolor sit amet, and Morgenstern 1950: Nash invents concept of Fusce sed adipiscing elit. Vivamus et magna.Nash sem sed equilibrium magna suscipit egestas. Game theory booms after this Lorem ipsum dolor sit amet, consectetuer 1994: Harsanyi, Nash, and Selten win Nobel adipiscing elit. Vivamus et magna. Fusce sed Prize in economics for game theory work

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Applications of Game Theory

Psychology Mathematics Title Law Computer Science Lorem ipsum dolor sit amet,Military Strategy consectetuer Biology adipiscing elit. Vivamus et magna. Fusce sed Management Economics sem sed magna suscipit egestas. Sports Political Science Lorem ipsum dolorRelations Game Playing International sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed Philosophy

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Key Elements of a game

Players: Who is interacting? Lorem ipsum dolor sit amet, consectetuer Strategies: What are their options? adipiscing elit. Vivamus et magna. Fusce sed magna What egestas. sem sed Payoffs:suscipitare their incentives? DGDG Lorem ipsum dolor What do they know? Information: sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed Rationality: How do they think? sem sed magna suscipit egestas.

Title

Types of games
Title Cooperative or non-cooperative
Zero sum and sit amet, Lorem ipsum dolornon-zero sum consectetuer adipiscing elit. Vivamus sequential Fusce sed Simultaneous and et magna. sem sed magna suscipit egestas. DGDG Perfect information and imperfect information Lorem ipsum dolor sit amet, consectetuer Finite & Vivamus et magna. Fusce sed adipiscing elit. Infinite Strategies sem sed magna suscipit egestas.

Pure Strategies
The upper value of the game is equal Lorem to the minimum of theamet, consectetuer ipsum dolor sit maximum values in the columns. adipiscing elit. Vivamus et magna. Fusce sed

Title

sem sed magna suscipit egestas. DGDG value of the game is equal The lower Lorem to the maximum of the minimum values ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed in the rows. sem sed magna suscipit egestas.

An Example:
A

TitleY2 Y1

Minimum

B Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed X1 10 6 6 sem sed magna suscipit egestas. DGDG Lorem ipsum dolor sit 7amet, -12 consectetuer X2 -12 adipiscing elit. Vivamus et magna. Fusce sed 6 Maximum sem sed magna suscipit egestas. 7 10 7

Mixed Strategies
Title
mixed dolor sit exists consectetuer Lorem Aipsum strategy gameamet, when there is no saddle point. Each player will adipiscing elit. Vivamus et magna. Fusce sed then optimize their expected gain by sem sed magna suscipit egestas. to use DGDG the percent of time determining Lorem each strategy. ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas.

Nash Equilibrium (NE)

A players best strategy is Lorem that strategy that sit amet, consectetuer ipsum dolor maximizes that elit. Vivamus et magna. Fusce sed adipiscing players payoff (utility), knowing the strategy's of the sem sed magna suscipit egestas. other players.

Title

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2-players Zero-Sum games

Penny Matching:
Each of the two players has a penny. Two players must simultaneously choose whether to show the Head or the Tail.

Title

Lorem ipsum following rules: amet, consectetuer dolor sit Both players know the adipiscing elit. Vivamus etboth -If two pennies match (both heads or magna. Fusce sed tails) sem sed then player 2suscipit egestas. magna wins player 1s penny. DGDG -Otherwise, player 1 wins player 2s penny. Lorem ipsum dolor sit amet, consectetuer Player 2 Head Tail adipiscing elit. Vivamus et magna. Fusce sed sem sed magna Player 1 Head -1 , 1 1 , -1 suscipit egestas.
Tail

1 , -1

-1 ,

Prisoners Dilemma

Title No communication:

- ipsum dolor undertaken consectetuer Lorem Strategies must be sit amet, without the full knowledge of et magna. Fusce sed adipiscing elit. Vivamus what the other players (prisoners) will do. sem sed magna suscipit egestas. DGDG Lorem ipsum dolor sit amet, consectetuer Players (prisoners) develop dominant strategiessed adipiscing elit. Vivamus et magna. Fusce but are not necessarily the best one. sem sed magna suscipit egestas.

Payoff Matrix for Prisoners Dilemma

Title

Confess

Ted

Not Confess Lorem ipsum dolor sit amet, consectetuer 1 year for Bill adipiscing elit. Confess VivamusBoth get 5 et magna. 10 years for Fusce sed sem sed magna suscipit egestas. years Ted

Lorem ipsum dolor 10 years for Bill consectetuer sit amet, 1 et magna. Fusce sed adipiscing elit. Vivamusyear for Ted Both get 3 Not Confess years sem sed magna suscipit egestas.

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An Example of Mixed Strategy game Title

Lorem ipsum dolor sit amet, consectetuer B doesnt B believes adipiscing elit. Vivamus et magna. believe sed Fusce B sem sed magna suscipit egestas. DGDG A bluffs 1 0 Lorem ipsum dolor sit amet, consectetuer A doesnt adipiscing elit. Vivamus et 0 magna. Fusce sed 0.5 bluff sem sed magna suscipit egestas.
A

Now lets Play This Game

Pirate Game
B

Title
C

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Nashs Equilibrium
Lorem ipsum dolor sit amet, consectetuer adipiscingplayers Vivamus et that strategyFusce sed elit. best strategy is magna. that A sem sed maximizessuscipit egestas. magna DGDGthat players payoff (utility), knowing the strategy's of the other players. Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed So when each player within a game follows their sem sed best strategy, a Nash egestas. will occur. magna suscipit equilibrium
This equilibrium occurs when each players strategy is optimal, knowing the strategy's of the other players.

Title

Definition: Nash Equilibrium

In the normal-form game {S1 , S2 , ..., Sn , u1 , u2 , ..., * * un}, a combination of strategies ( s1 ,..., sn ) is a Nash equilibrium if, for every player i, * Given others ui ( s1 ,..., 1, si* , si* sit* Lorem ipsum si*dolor1,..., sn ) amet, consectetuer

Title

* * adipiscingui elit. sVivamus et) magna. Fusce sed ( s1 ,..., i*1, si , si*1,..., sn sem i S That is, i* solves for all ssedi .magnassuscipit egestas. DGDG* * * * Maximize ui ( s1 ,...,dolor si 1,..., samet, consectetuer Lorem ipsum si 1, si , sit n ) Subject to i S adipiscing selit.i Vivamus et magna. Fusce sed sem sed magna suscipit egestas.

choices, player i cannot be better-off if she deviates from si*

Nashs Equilibrium cont.:

Bayesian Nash Equilibrium

The Nash Equilibrium of the imperfectTitle information game A Bayesian Equilibrium is a set of strategies consectetuer Lorem ipsum dolor sit amet, such that each player is playing a Vivamus et magna. Fusce adipiscing elit. best response, given a particular set ofsed beliefs about the move by nature. sem sed magna suscipit egestas. DGDGsame prior beliefs about the probability All players have the Lorem ipsum dolor sit amet, consectetuer distribution on natures moves. adipiscing elit. Vivamus et magna. Fusce sed So for example, all players think the odds of player 1 being of a semparticular type is p,suscipit egestas. being the other type is 1sed magna and the probability of her
p

Refrences

Title Dixit and Nalebuff: Thinking Strategically Dutta: Lorem ipsum dolor sit amet, consectetuer Strategies and Games:et magna. Fusce sed Theory and Practice adipiscing elit. Vivamus www.gametheory.net sem sed magna suscipit egestas.
Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas.

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