MEHAK WADHERA ROHIT LUTHRA

DEFINITION
A type of decision theory based on reasoning, in which choice of action is determined after considering the possible alternatives available to the opponents playing the same game.

Dates back to 1944 Theory of Games and Economic Behavior, Von Neumann & Morgenstern
Applications War strategies Collective bargaining Management decisions

FEATURES

Finite number of competitors Finite number of courses of action Knowledge of alternatives available to opponent Choice Outcome or Gain Choice of opponent

BASIC CONCEPTS
TWO PERSONS ZERO-SUM GAME Involves two players Gains made by one person=Loss incurred by other Sum of gains & losses = Zero PAY OFF MATRIX Gains & losses represented in the form of a matrix Player on LHS is Maximising/Offensive player Player on top of matrix is Minimising/Defensive player

VALUE OF THE GAME The offensive players gain and the defensive players loss
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TYPES OF STRATEGY
PURE STRATEGY: A pure strategy defines a specific move or action that a player will follow in every possible attainable situation in a game MIXED STRATEGY: A strategy consisting of possible moves and a probability distribution when keeping the opponent guessing is desirable - that is, when the opponent can benefit from knowing the next move.

MAXIMIN-MINIMAX PRINCIPLE
MAXIMIN CRITERIA: Maximising player lists his minimum gains Selects the maximum out of these MINIMAX CRITERIA: Minimising player lists his maximum loss Selects the minimum out of these

SADDLE POINT
A value that is simultaneously the minimum of a row and the maximum of a column Gives the optimal solution May or may not exist in a given game More than one saddle point implies more than one optimal solution

A PURE STRATEGY GAME

Each player adopts a single strategy as an optimal strategy irrespective of the other players strategy Offensive player selects the strategy with the largest of the minimum payoffs (maximin) Defensive player selects the strategy with the smallest of the maximum payoffs (minimax) Game is solved when MAXIMIN VALUE=MINIMAX VALUE

ILLUSTRATION
There are two lighting fixture stores, X and Y, who have had relatively stable market shares. Two new marketing strategies being considered by store X may change this peaceful coexistence. The payoff table below shows the potential affects on market share if both stores begin to advertise.

Store X Store Y Strategies Strategies 1 (radio) 2 (newspaper) 1 (radio) 2 7 2 (newspaper) 6 -4

(Offensive player is on left, Defensive player is on top)

 Maximin strategy for Store X, the offensive player Optimal strategy is strategy 1

Store X Store Y Strategies Minimum Strategies 1 (radio) 2 (newspaper) Payoff 1 (radio) 3 5 3 row 2 (newspaper) 1 -2 -2 minimums

maximin: maximum of the minimum payoffs

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 Minimax strategy for StoreY, the defensive player Optimal strategy is strategy 1

Store X Strategies 1 (radio) 2 (newspaper) Maximum Payoff

Store Y Strategies 1 (radio) 2 (newspaper) 3 5 1 -2 3

column maximums

minimax: minimum of the maximum payoffs

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MIXED STRATEGY GAMES

If both players are logical and rational, it can be assumed a minimax criterion will be employed

Existence of a saddle point is indicative of a pure strategy game

A mixed strategy game results if: Minimax criterion are not employed, or Each player selects an optimal strategy and they do not result in a saddle point when the minimax criterion is used.

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EQUAL GAINS METHOD

A plan of strategies such that the expected gain of the maximizing player or the expected loss of the minimizing player will be the same regardless of the opponents strategy For 2 X 2 games, an algebraic approach based on the diagram below can be used to determine the percentage of the time that each strategy will be played

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EQUAL GAINS METHOD

Where Q and 1 - Q = the fraction of time X plays strategies X1 and X2, respectively P and 1 - P = the fraction of time Y plays strategies Y1 and Y2, respectively

X1 X2

Y1 4 1
P

Y2 2 10
1-P

Q 1-Q

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STEPS
Steps for determining the optimum mixed strategy for a 2 X 2 game algebraically (1) Compute the expected gain for player X Arbitrarily assume that player Y selects strategy Y1 given this condition, there is a probability q that player X selects strategy X1 and a probability 1 - q that player X selects strategy X2 expected gain = 4q + 1(1 - q) = 1 + 3q Arbitrarily assume that player Y selects strategy Y2 given this condition, there is a probability q that player X selects strategy X1 and a probability 1 - q that player X selects strategy X2 expected gain = 2q + 10(1 - q) = 10 - 8q

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(2) Player X is indifferent to player Ys strategy Equate the expected gain from each of the strategies 1 + 3q = 10 - 8q 11q = 9; q = 9/11

q = the percentage of time that strategy X1 is used

Player Xs plan is to use strategy X1 9/11 of the time and strategy X2 2/11 of the time

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(3) Compute the expected loss for player Y Arbitrarily assume that player X selects strategy X1 given this condition, there is a probability p that player Y selects strategy Y1 and a probability 1 - p that player Y selects strategy Y2 expected loss = 4p + 2(1 - p) = 2 + 2p Arbitrarily assume that player X selects strategy X2 given this condition, there is a probability p that player Y selects strategy Y1 and a probability 1 - p that player Y selects strategy Y2 expected loss = 1p + 10(1 - p) = 10 - 9p

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(4) Player Y is indifferent to player Xs strategy Equate the expected gain from each of the strategies 2 + 2p = 10 - 9p 11p = 8; p = 8/11

p = the percentage of time that strategy Y1 is used

Player Ys plan is to use strategy Y1 8/11 of the time and strategy Y2 3/11 of the time

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VALUE OF A MIXED STRATEGY GAME

X1 X2 Y1 4 1 Y2 2 10
9/11 2/11 8/11 3/11

Once optimum strategies are determined, the value of the game can be calculated by multiplying each game outcome times the fraction of time that each strategy is employed

Game Outcome Q 4 x 9/11 x 2 x 9/11 x 1 x 2/11 x 10 x 2/11 x Value of the Game

P 8/11 3/11 8/11 3/11

= = = =

2.38 0.45 0.13 0.50 3.46

Value of the game is the average or expected game outcome after a large number of plays
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ODDS METHOD
Possible only in case of games with 2x2 matrix.

Sum of column odds and row odds is equal.

METHOD OF FINDING OUT ODDS Find out the difference in value of cell (1,1) and (1,2) of 1st row and place it in front of 2nd row. Find out the difference in value of cell (2,1) and (2,2) of 2nd row and place it in front of 1st row. Find out the difference in value of cell (1,1) and (2,1) of 1st column and place it in front of 2nd column. Find out the difference in value of cell (1,2) and (2,2) of 2nd column and place it in front of 1st column.
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Mathematically

X1 X2 ODDS

Y1 a1 b1
(a2 - b2)

Y2 a2 b2
(a1 - b1)

ODDS
(b1 - b2) (a1 - a2)

Value of game = a1(b1 b2) + b1(a1 a2) (b1 b2) + (a1 a2)

Probabilities for X1 = b1 - b2 , X2 = a1 a2 . (b1-b2) + (a1-a2) (b1-b2) + (a1-a2)

Probabilities for Y1 = a2 - b2 , Y2 = a1 b1 . (a2-b2) + (a1-b1) (a2-b2) + (a1-b1)
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DOMINANCE
The principle of dominance can be used to reduce the size of games by eliminating strategies that are dominated by other strategies in all conditions A strategy is dominated, and can therefore be eliminated, if all of its payoffs are worse or no better than the corresponding payoffs for another strategy

By eliminating some of the rows & columns, if the game is reduced to 2x2 form it can be solved by Odds Method.

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DOMINANCE
X1 X2 X3 Y1 4 2 1 Y2 3 20 1

CASE 1

X1 X2

Y1 -5 -2

Y2 4 6

Y3 6 2

Y4 -3 -20

CASE 2

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DOMINANCE
X1 X2 X3 Y1 4 2 1 Y2 3 20 1

X3 will never be played because player X can always do better by playing X1 or X2

X1 X2

Y1 -5 -2

Y2 4 6

Y3 6 2

Y4 -3 -20

Y2 and Y3 will never be played because player Y can always do better by playing Y1 or Y4
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SUB-GAMES METHOD
One of the players has 2 alternatives while other more than 2. Useful when no saddle point and cannot be reduced by dominance method. PROCEDURE Divide the m*2 or 2*n game matrix into as many games as possible. Taking each game one by one, value of each sub game is found. Select the best sub game from point of view of the player who has more than two alternatives. The strategies for this selected sub game will hold good for both the players for the whole game and the value of the so selected sub game will be the value of complete game.
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APPROXIMATION METHOD OR ITERATIVE METHOD

Can be applied to solve 3*3 or higher games. Gives an approximate solution for the value of game. PROCEDURE Player A chooses the superior strategy over the other and places that row below the matrix. Player B examines this row and chooses a column corresponding to the smallest number in that row.This column is placed to the right of matrix. Player A examines this column and selects a row corresponding to the largest number in this column.This row is then added to the row last chosen and then sum of the two rows is placed below the previous row selected.

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 Player B chooses a column corresponding to the smallest number in the row and adds this column to the last chosen and place it below the previous column selected. In case of tie, the player should choose the row or column different from his last choice.The procedure is repeated for a number of iterations. The upper limit of the game is calculated by dividing the highest number in the last column by the total number of iterations.Similarly the lower limit of the game is determined by dividing the lowest number in the last row by the total no of iterations.

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SUMMARY
Develop Strategies and Payoff Matrix Is There a Pure Strategy/ Solution? No Is Game 2 x 2? No Can Dominance be Used to Reduce Matrix? Yes Solve for Mixed Strategy Probabilities and Value of Game Yes Solve Problem for Saddle Point Solution and Value

Yes

No

Use algebraic,sub games, Or approximate method

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