Game Theory An

Overview
Shri Prakash
Amitabh Kundu
Shoumendu Sarkar

Game Theory Introduction

High level sense of what's Game Theory,defining games and
work through some key ingredients of games and the kind of
concepts that we are going to think about in the rest of the
workshop.
What Game Theory isn't? (is and isn't?)
Game Theory doesnt use the word Game in a way that
most of are used to in common life. Instead Game theory is a
way of thinking about strategic interactions between self
interested people.
Its very important for Economics, Computer
science,Psychology,Politics and variety of other disciplines
What ties these disciplines together is their concern for
thinking about how self interested participants will behave in
strategic interactions and also thinking how those interactions
should be structured for eg:Government or a designer of a

Self Interested Agent/player

It doesnt mean that agents are adversarial or that they want to
harm others or they care only about themselves
Agents have opinions and preferences (utilities)about how they
world should be and that the agent has his own description of the
states of the world it likes and acts based on this description
Each such agent has a utility function. Utility function is a
mathematical measure that tells you of how much the agent likes or
does not like a certain situation.
Describes attitude towards a definitive event eg:tommorow temp
will be 25 degree Celsius. It captures their attitude towards the
uncertainty of that event.Eg:If I say that 25 degree Celsius with
probability of 0.7 and 24 degree Celsius with probability of 0.3 then
you might have an opinion about how much you like the
distribution.Utility function quantifies degree of preference across
alternatives.
Decision theoretic rationality or approach underlies modern game

Defining Games Key

Ingredients
Players in the game who are making the decisions or central
decisions makers
The players could be :Govts(Negotiating over trade
agreements),Companies(Choosing strategy for developing
products),Employees of a company and so on.
Next we have to decide how to model the actions-ie.,what actions
the players actually take?What can the players do?
Whether to enter a bid in an auction
When we are talking about bargaining we might be deciding
whether to end a strike
When we are thinking about investing it could be to buy or sell a
stock?when to buy or sell it?how they should react to other people?
When people are deciding to vote? how should they vote?
Pay offs-what s motivating the players?Do they care about profits or
other players actions etc?How are they receiving utility as a function
of the action of others/they are taking?

Two standard representations

Basically there are two standard representations of Games.
One is a normal form (aka Matrix form) strategic form. Its a simple
representation of a game. It lists what pay offs players get as a
function of their actions. Normally its thought of as if players are
moving simultaneously but strategies can encode many things.
The Alternate representation is extensive forms. It includes more
explicit timing in the moves Who moves at what point in time.
That is more often is representated in the form of a tree. Players
move sequentially. For example in Chess White player moves first
and then black player can see the white players moves and then
react. This keeps tracks of what each player knows when each
players makes each move or decision e.g.: In Poker somebody
moves first, they make a bet and the other player only sees the
bet and not necessarily the cards the other player sees.

The Normal Form

We are going to think of finite set of players(n-person normal form
game(N,A,u)
Players:N=(1,,n) is a finite set of n, indexed by i.
1 through n represents the list of players and i represents a general
player
Action set for player Ai
a=(a1,.an) A=Ai x.x An is an action profile.(Ai represents actions
of player i)
(a1,an)represents a list of what every player is doing.For instance,
are they deciding to cooperate or not to cooperate as in prisoners
dilemma.
Utility function or payoff function for player i:ui:A R
(Utility function is a payoff function which indicates as a functions of
all the (A)actions that are played, what are the (R)payoffs)

Normal Form games: Standard matrix

representation
The most standard representation of the two player game is as a
matrix.
Writing a 2-player game as a matrix
In this matrix player 1s actions will be represented in rows and 2s
in columns ie Player 1 is a row player and Player 2 is a column
player.
Rows correspond to actions a1 A1,columns correspond to
actions A2 a2
Cells listing utility or payoff values for each player.row player first
then the column.

Two Player Matrix

Player 1 has two choices in row 1 and 2 and player 2 is a column
player and he has two choices in two columns. Inside the cells, the
first element represents the payoff for the first player or row
player and second element in the cell represents the
payoff(decision/action) of the Player
column
2 player. So each cell
represents the
strategic interaction.
Backoff
C
D
Game as a
matrix
Player 1

-1,-1

-4,0

0,-4

-3,-3

A Large collective action

game
This cannot be written in a normal form.
Players N= (1,.,10,000,000)
Whether or not this population wants to revolt against the Govt.Here we have many more
players. We imagine a population of 10million players. We cannot write it down as a matrix.
Action set for player i Ai=(Revolt, Not)
They have a choice here of revolting or not revolting. So there action set is binary. The payoffs
are the critical thing in this game.
Utility function for Player i:
ui(a)=1 if not=(j:aj=revolt)>=2000,000
ui(a)=-1 if not=(j:,aj=revolt)<2000,000 and aj=revolt
ui(a)=0 if not=(j:aj=revolt)<2000,000 and ai=Not

The payoff are the critical aspect of this game. What happens, lets say for the revolt to be
successful you need at least 2m people to participate.
Successful revolt represented by ui(a)=1,where player gets a payoff of 1.If j(no of players)
such that they picked revolt is greater than or equal to 2m.(Regardless of whether i revolts or
not).
What happens if revolt fails ie we end up with less than 2m choosing to revolt.If player i was a
participant of the revolt he gets a payoff of -1(Govt punishes the revolting players or apply
sanctions) and they get a payoff of 0 where the revolt is unsuccessful and player i did not
revolt,he gets a payoff of 0.
Players have to strategically analyze and predict what other players are going to do as their

Solving Games
Now we are ready to start solving games.How people play in
different settings.Now we are talking about Nash Equilibrium.Its
the most standard solution concept of Game theory, named after
John Nash a celebrated mathematician from Princeton University.
He won the Nobel prize for his work on the subject.
So we approach Nash equilibrium through a game by another
important economist John Maynard Keynes.
Game is called John Maynard Keynes Beauty Contest Game.
Keynes describes a situation
You hold a stock and the price is rising. You are an investor trying to make a
profit.
You begin to believe that the price is too high to be justified by the value of the
company. In other words, you are thinking the stock is overvalued or that there
is a bubble in the market.
You are starting to think of selling. But would like to wait until the price is at its
peak.
You would like to get out of the market just before other investors.
So this a game where you have to predict what other people think about the
stock price and what they are going to do and when they want to get out. In
other words, how will they act and what should you do in response.

Keynes Beauty Contest Game Stylized Version

Keynes described there was a newspaper in England that had a
contest where players had to guess which picture of several
women other readers will think was the most attractive. It wasnt
to guess what you thought but what were thinking. Keynes likened
investing to this. Not only what you are thinking of the stock but
what others are thinking about the stock, thats important in
driving your decision.
Each player names an integer between 1 and 100.
Players move simultaneously and the player who names integer closer to twothirds of the average integer wins a prize and others get nothing.
If two people happen to hit the same integer ties are broken uniform ally at
random Just toss a coin.
So you have to think of what others are going to do and forecast your
response to that.

Strategic Reasoning

What will other players do? You have to reason through that.
What should I do in response?
Each player is choosing their optimal response to the others
Solving the Beauty Contest Game
Suppose a player believes the average play will be X(including his own
integer)
The players optimal strategy is to say the closest integer to 2/3 X
x has to less than 100,so optimal strategy of any player can be no more
than 67
If X is no more than 67 then optimal strategy of any player has to be no
more than 2/3 67
If x is no more than 2/3 67 then the optimal strategy of any player has to
be no more than (2/3)square 67.
Iterating the unique Nash Equilibrium of this game is for every layer to
announce 1!
So this will be a stable point. So you are trying to predict the expectation

Domination Dominated and Dominant Strategy

Some games have an important property, its called dominant strategy.
Strategy means just choosing an action/choice of action(pure strategy).
Let si and Si be two strategies for player i and let S-i be the set of all possible
strategy profiles for the other players

si strictly dominates Si if

S-i

S-I ,ui(si , S-i )> ui (Si, S-i )

si strictly dominates if its the case that every other strategy profile(set of actions that they
could take of other players) the utility player i gets when he plays si is more than utility i gets
when he plays Si .It might matter to him what others do but this is also the case when he
plays si than when he plays Si ..Infact,he is strictly happier. He gets strictly greater utility by
playing si than when plays Si,.

si very weakly dominates Si , if

S-i

S-I ,ui(si , S-i ) ui (Si, S-i )

This is the other notion of dominance. The only difference is that we have a weak inequality
rather than a strict inequality. No matter what others do i is at least as much happy playing si
as I is when playing Si .That means si weakly dominates Si Why have I written very weak?
Because this condition allows for even equality. There are other kinds of dominance that exist
but we ignore them for our current purpose.

=Vector(for all)

Equilibria and Dominance

If one strategy dominates all others, we say it is dominant
A strategy profile consists of dominant strategies for every player
must be a Nash equilibrium
An equilibrium is strictly dominant strategies must be unique.
What is so important about dominance?
If one strategy dominates all of the other strategies in that case
then this strategy si is better than everything else and in that case
I cant say that it dominates something but I can say its dominant.
If I have a dominance strategy then I dont have to worry about
what the other players are doing and I can just play my dominance
strategy thats going to be the best thing to do for me.Hence,a
strategy profile where everyone is playing their dominant strategy
then we have a Nash equilibrium. Then no one wants to change
what they are doing and for everyone there is nothing better to
do.
Furthermore, if we have a strictly dominant strategy then the
equilibrium must be unique. There cant be two equilibria because

Equilibria and Dominance

Lastly, we talk about prisoners dilemma and argue that players
have a dominant strategy here.
Player 1 has a dominant strategy of playing D
Player 2 plays C.Then Player 1 is thinking about the first column and two rows of
the matrix. He knows he is in this column. So he faces a choice of getting a payoff
of -1 and 0.0 is bigger than -1.So his dominant strategy should be to play for 0.His
best response to player 2 is to play strategy D.
If Player 2 plays D.Then player 1 is thinking about second column and two rows of
the matrix. Player 2 is facing a grim choice to get a payoff of-3 or -4.Both these
numbers are smaller than the choice he had. Its obvious he would like the first
column than the second column. If he finds himself in the second column he would
still prefer -3 to -4 as its bigger than -4.So in this case again, he prefers to play
strategy D.So we can clearly see that Player 1 has a dominant strategy D
regardless of player 2 does.D is Player 1 best response. In both case, his preference
2 D is the dominant strategy here.
was strict (>) strictly strategy D in thisPlayer
case. So

Player 1

-1,-1

-4,0

0,-4

-3,-3