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Original Title: Game Theory Ms

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On Game Theory.

Submitted to: Professor Mihir Dash November 20

Introduction

Game theory is a branch of applied mathematics that is used in the social sciences, most notably in economics, as well as in biology (particularly evolutionary biology and ecology), engineering, political science, international relations, computer science, and philosophy. Game theory attempts to mathematically capture behavior in strategic situations, or games, in which an individual's success in making choices depends on the choices of others (Myerson, 1991). While initially developed to analyze competitions in which one individual does better at another's expense (zero sum games), it has been expanded to treat a wide class of interactions, which are classified according to several criteria. Today, "game theory is a sort of umbrella or 'unified field' theory for the rational side of social science, where 'social' is interpreted broadly, to include human as well as non-human players (computers, animals, plants)" To sum up Game theory is the study of the ways in which strategic interactions among economic agents produce outcomes with respect to the preferences (or utilities) of those agents, where the outcomes in question might have been intended by none of the agents.

Examples:

: 1: Planning a party An agent is planning a party, and is worried about whether it will rain or not. The utilities and probabilities for each state and action can be represented as follows: Nature's states: Rain No (p=1/3) (~p=2/3) Party planner's possible actions: Outside 1 3 Inside 2 2 The expected utility of an action A given uncertainty about a state S = Probability(S|A)*Utility(S|A) + Probability(not S|A)Utility(not S|A) Note that action A can be viewed as a compound gamble or outcome. Also, note that the probability of a state can depend on the agent's choice of action, although, in the above example, it does not. For the party problem: EU(Outside) = (1/3)(1) + (2/3)(3) = 2.67; EU(Inside) = (1/3)(2) + (2/3)(2) = 2 Therefore, choose Outside, the action with the higher expected utility : 2: Prisoners' dilemma Consider Stan and Leland, two prisoners who have each been offered a deal to turn state's witness (defect) against the other. They can't communicate. They had orginally agreed to remain in solidarity, i.e. not testify against each other, but since the agreement cannot be enforced, each must choose whether to honor it. If both remain in solidarity, then they will each only be convicted of a minor chage. If only one defects, then the state will throw the book at the other and let the defector go. If they both defect, each will get convicted of a serious charge. The payoff matrix (higher positive utility implies a better outcome) is as follows:

Stan

Solidarity Defection

In this game, the strategy of defection is weakly dominant for each player, meaning that whatever the other player does, defecting yields an outcome at least as good and possibly better than remaining in solidarity would. Note that if the bottom right cell payoffs were (2,2) instead of (1,1), then defecting would be strictly dominant for each player. Either way, Defection-Defection is a dominant strategy equilibrium. However, it is not Pareto optimal. Both players could be made better off if neither defected against the other. This is an example of a social dilemma: a situation in which each agent's autonomous maximization of selfutility leads to an inefficient outcome. Such a situation can occur for any number of people, not just two. An agreement by two people to trade with each other (involving goods, services, and/or money) set's up a prisoners' dilemma-type game whenever the agreement cannot be enforced.

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