Jerome Lloyd A.

Igaya
BSA I – 11

Extension of Game Theory

Although American mathematician John von Neumann (1903-1957) is usually credited with
founding the modem discipline of game theory, other 20th century thinkers helped set the stage
for von Neumann and subsequent theorists. Early game theory works—including von Neumann's
—focused on winner-takes-all (zero-sum) games with pure competition, such as chess and
checkers.

For example:
One of the first game theory works of the century was a theorem developed for zero-sum games
propounded in 1913 by Ernst Zermelo, who argued that games such as chess are strictly
determined because all information in the game is immediately revealed and because prescribed
rules govern the actions of all players. The solution to chess is so complex, however, that no one
can actually determine it. Players win a game of chess not by executing a solution, but executing
an imperfect strategy and capitalizing on the opponent's mistakes. In contrast, people can
determine the solution to tic-tac-toe and easily obtain stalemates.

Harold Kuhn expanded on Zermelo's theorem by arguing that strategies in plays in a game will
be in equilibrium if decisions made by the players are rational. These equilibria may be extended
to combinations of plays, and even to the game as a whole, removing the limitation that games
be zero-sum and individually rational. Another extension of the theory was made by Rufus
Isaacs, who established the concept of the differential game, where perfect information may not
exist.

Theory of Parlor Games

 In 1928 von Neumann published his seminal article, "Theory of Parlor Games," in which
he discussed bluffing in poker, addressed the economic and military applications of game
theory, and developed the "minimax" strategy where decision makers attempt to
minimize the maximum amount of losses other decision makers can inflict.
American economist, Oskar Morgenstern (1902-1977) recognized the interactive nature of
economic activities—that each person's decisions depend on the decisions of every other
person's. In their groundbreaking book, The Theory of Games and Economic
Behavior,  published in 1944, Morgenstern and von Neumann developed applications of game
theory to the problems raised by interactivity.
Moreover, von Neumann and Morgenstern provided a basis for new concepts in game theory,
including the idea of cooperative and noncooperative games.

 A cooperative game is one in which sets of players are bound by agreements to work in
mutual, rather than individual, interest—even when noncooperative play would be more
beneficial.
 A non-cooperative game is a game with competition between individual players, as
opposed to cooperative games, and in which alliances can only operate if self-enforcing
(e.g. through credible threats).

In the 1950s, John Nash and others expanded the study of noncooperative game theory and
created the framework for cooperative game theory. Nash's identification of equilibrium in game
theory models contributed significantly to modem game theory. Nash addressed noncooperative
strategies, particularly in cooperative games where subversion is a strategic consideration. In
1951 he provided applications of the von Neumann-Morgenstern interdependency theorem,
previously used mostly in military strategy, to economic problems.

Individual Rationality
Central to Nash's approach is the concept of individual rationality, where each player may
determine when it is best to abrogate an agreement. Nash said an equilibrium is established in
any noncooperative game where agreements are self-enforcing—where the benefits of cheating a
partner are outweighed by future retribution. The Nash equilibrium is observed in games where
players adopt mixed strategies, or pursue a course of play with two or more different, but related,
goals.

Nash equilibria may be said to make noncooperative games cooperative, and games featuring it
are therefore somewhat predictable. But they illustrate another facet of game theory, that of
Pareto efficiency, named for Italian economist Vilfredo Pareto (1848-1923). Cooperative players
will negotiate an alliance that is individually Pareto-optimal; their payoff will be less, but their
chances of winning something are better.
Reference:
 https://www.referenceforbusiness.com/encyclopedia/For-Gol/Game-
Theory.html#ixzz6KbgJjsLD