GAME THEORY

BY:ROOHI JINDAL SWATI MANCHANDA

Game Theory

The study of rational behavior among interdependent agents

Agents have a common interest to make the pie as large as possible, but Agents have competing interests to maximize their own share of the pie. An agents rational decisions require anticipating rivals responses These expectations are not perfect, so uncertainty is a necessary feature of games

Three elements in every game

Players

Two or more for most games that are interesting

Strategies available to each player Payoffs

Based on your decision(s) and the decision(s) of other(s)

Game theory: Payoff matrix

Person 2

Action C

Action D

Person 1

Action A10, 2

8, 3

Action B12, 4

10, 1

A payoff matrix shows the payout to each player, given the decision of each player

How do we interpret this box?

Person 2

Person 1

Action Action C D Action 10, 2 8, 3 A Action 12, 4 10, 1 B

The first number in each box determines the payout for Person 1 The second number determines the payout for Person 2

How do we interpret this box?

Person 2

Example

Person 1

Action Action C D Action 10, 2 8, 3 A Action 12, 4 10, 1 B

If Person 1 chooses Action A and Person 2 chooses Action D, then Person 1 receives a payout of 8 and Person 2 receives a payout of 3

Back to a Core Principle: Equilibrium

The type of equilibrium we are looking for here is called Nash equilibrium

Nash equilibrium: Any combination of strategies in which each players strategy is his or her best choice, given the other players choices Exactly one person deviating from a NE strategy would result in the same payout or lower payout for that person

Steps 1 and 2
Person 2

Action C
Person 1

Action D

Action 10, 2 A Action B 12, 4

8, 3

10, 1

Assume that you are Person 1 Given that Person 2 chooses Action C, what is Person 1s best choice?

Step 3:
Person 2

Action C
Person 1

Action D

Action 10, 2 A Action B 12, 4

8, 3

10, 1

Underline best payout, given the choice of the other player Choose Action B, since 12 > 10 underline 12

Step 4
Person 2

Action C

Action D 8, 3

Person 1

Action A 10, 2

Action B 12, 4

10, 1

Now assume that Person 2 chooses Action D Here, 10 > 8 Choose and underline 10

Step 5
Person 2

Action C

Action D

Person 1

Action 10, 2 A Action 12, 4 B

8, 3

Now, assume you are Person 2 If Person 1 chooses A

3>2 underline 3

10, 1

If Person 1 chooses B

4>1 underline 4

Step 6
Person 2

Action C

Action D

Person 1

Action A 10, 2

8, 3

Which box(es) have underlines under both numbers?

Action B 12, 4

10, 1

Person 1 chooses B and Person 2 chooses C This is the only NE

Double check our NE

Person 2

Action C

Action D

What if Person 1 deviates from NE?

Person 1

Action A 10, 2

8, 3

Action B 12, 4

10, 1

Could choose A and get 10 Person 1s payout is lower by deviating

Double check our NE

Person 2

Action C

Action D

What if Person 2 deviates from NE?

Person 1

Action A 10, 2

8, 3

Action B 12, 4

10, 1

Could choose D and get 1 Person 2s payout is lower by deviating

Dominant strategy
Person 2

Action C

Action D

Person 1

Action A 10, 2

8, 3

A strategy is dominant if that choice is definitely made no matter what the other person chooses

Action B 12, 4

10, 1

Example: Person 1 has a dominant strategy of choosing B

Prisoners Dilemma

Two suspects are arrested for a crime. The district attorney has little evidence in the case and is eager to extract a confession. The two suspects are separated.

.Then

Prisoners Dilemma B
Confess A ( -8, -8) ( 0, -15) Dont Confess

Confess

Dont Confess

( -15, 0)

( -1, -1)

Prisoners Dilemma B
A Confess Dont Confess

Confess

( -8,

-8)

( 0, -15)

Dont Confess

( -15, 0)

( -1, -1)

Prisoners Dilemma Tchaikovsky

Conductor Confess Dont Confess

Confess

( -8,

-8)

( 0, -15)

Dont Confess

( -15, 0)

( -1, -1)

Prisoners Dilemma

Conclusion: A will confess And B?

Prisoners Dilemma B
Conductor Confess Dont Confess

Confess

( -8,

-8)

( 0, -15)

Dont Confess

( -15, 0)

( -1, -1)

Prisoners Dilemma B
A Confess Dont Confess

Confess

( -8,

-8)

( 0, -15)

Dont Confess

( -15, 0)

( -1, -1)

Prisoners Dilemma

Conclusion: B confesses also Both get 8 years, even though if they cooperated, they could get off with one year each For both, confession is a dominant strategy: a strategy that yields a better outcome regardless of the opponents choice

Prisoners Dilemma

What would the A and B decide if they could negotiate? They could both become better off if they reached the cooperative solution.
which is why police interrogate suspects in separate rooms. Equilibrium need not be efficient. Noncooperative equilibrium in the Prisoners dilemma results in a solution that is not the best possible outcome for the parties.

Equilibrium Both confess is a Nash Equilibrium Both dont confess is not a Nash Equilibrium, rival will always want to renege

Mixed strategies

A probability distribution over the pure strategies of the game Rock-paper-scissors game Each player simultaneously forms his or her hand into the shape of either a rock, a piece of paper, or a pair of scissors Rule: rock beats (breaks) scissors, scissors beats (cuts) paper, and paper beats (covers) rock No pure strategy Nash equilibrium One mixed strategy Nash equilibrium each player plays rock, paper and scissors each with 1/3 26 probability

Can you think of ways game theory can be used in these games?

THANK YOU..