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Game Theory

Quantitative Analysis for Decision Making

M.Ghotbi
M.Pajhouh Niya

Abbas Keramati ( Assistant Professor)


University of Tehran MBA
Fall 2008

Outline

What is Game Theory?


History of Game Theory
Title
Applications of Game Theory
Lorem Key
ipsum
dolor
sit
amet,
Elements
of a game
consectetuer
Types adipiscing
of games elit. Vivamus et
magna.
Fusce
sed
sem
sed
magna
Nash
Equilibrium (NE)
suscipit egestas.
Pure Strategies & Mixed Strategies
Lorem
ipsum
dolor
sit
amet,
2players Zero-Sum games

DGDG

consectetuer adipiscing elit. Vivamus et


magna. Fusce sed sem sed magna
suscipit egestas.

What is Game Theory?


Title
In strategic
games,
choose
Lorem
ipsum
dolor agents
sit
amet,
strategies
that will
maximize
consectetuer
adipiscing
elit.
Vivamustheir
et
strategies
the
magna.return,
Fuscegiven
sed the
sem
sed magna
DGDG
other
agents
choose.
suscipit egestas.
Lorem
ipsum
dolor
sit
amet,

The mathematics
of human
consectetuer
adipiscing elit.
Vivamus et
interactions
magna. Fusce sed sem sed magna
suscipit egestas.

History of Game Theory


von Neumann wrote a key paper in
1928
Theorydolor
of Games
Lorem 1944:
ipsum
sitand Economic
amet,
Behavior
by von Neumann
and et
consectetuer
adipiscing
elit. Vivamus
Morgenstern
magna. Fusce sed sem sed magna
1950: Nash invents concept of Nash
suscipit egestas.
equilibrium
Lorem
ipsum
dolor
sit
amet,
Game theory booms after this
consectetuer adipiscing elit. Vivamus et
1994: Harsanyi, Nash, and Selten
magna.win
Fusce
sed
sem
sed
magna
Nobel Prize in economics for game
suscipittheory
egestas.
work

Title

DGDG

Applications of Game
Theory
Psychology
Mathematics
Title
Computer Science Law
Lorem Biology
ipsum
dolor Military
sit
amet,
Strategy
consectetuer
adipiscing elit.
Vivamus et
Management
Economics
magna.
Fusce Science
sed sem Sports
sed magna
Political
suscipit
egestas.
Game Playing
International
Lorem Relations
ipsum
dolor
sit
amet,
consectetuer
adipiscing elit. Vivamus et
Philosophy

DGDG

magna. Fusce sed sem sed magna


suscipit egestas.

Key Elements of a game


Title

Players: Who is interacting?

Lorem
ipsum
dolor
sit
amet,
Strategies:
What
are
their option
consectetuer
adipiscing
elit.
Vivamus
et
magna.
Fusce sed
sem
sed incentives
magna

Payoffs:
What
are
their
DGDG
suscipit egestas.
Information: What do they know?
Lorem
ipsum
dolor
sit
amet,
Rationality:
How
doVivamus
they think?
consectetuer
adipiscing
elit.
et
magna. Fusce sed sem sed magna
suscipit egestas.

Types of games
Cooperative
or non-cooperative
Title
Zero
sum and
non-zero
Lorem
ipsum
dolor
sit sum
amet,
consectetuer
adipiscing
elit.
Vivamus et
Simultaneous
and
sequential
magna. Fusce sed sem sed magna
DGDG
Perfect information and imperfect
suscipit egestas.
Lorem information
ipsum
dolor
sit
amet,
consectetuer
adipiscing
elit. Vivamus et
Finite &
Infinite Strategies
magna. Fusce sed sem sed magna
suscipit egestas.

Pure Strategies
Title

The upper value of the game


to the dolor
minimumsit
of theamet,
Lorem is equal
ipsum
maximum
values in elit.
the Vivamus et
consectetuer
adipiscing
columns.
magna.
Fusce sed sem sed magna

DGDG
suscipit egestas.

The lower value of the game


Lorem is equal
ipsum
to the dolor
maximumsit
of theamet,
consectetuer
adipiscing
elit.rows.
Vivamus et
minimum
values in the

magna. Fusce sed sem sed magna


suscipit egestas.

An Example:
A

Title
Y1
Y2

Minimum

Lorem B ipsum
dolor
sit
amet,
consectetuer adipiscing elit. Vivamus et
X1
10
6
6
magna. Fusce sed sem sed magna
DGDG
suscipit egestas.
X2
-12
7
-12
Lorem
ipsum
dolor
sit
amet,
6
consectetuer
adipiscing
elit.
Vivamus
et
Maximum
10
7
7
magna. Fusce sed sem sed magna
suscipit egestas.

Mixed Strategies
Title
strategy
LoremA mixed
ipsum
dolorgame
sitexistsamet,
when there
is no saddle
consectetuer
adipiscing
elit. point.
Vivamus et
Each player will then optimize
magna.
Fusce sed sem sed magna
DGDG
their expected gain by
suscipit egestas.
determining the percent of time
Loremto use
ipsum
dolor
sit
amet,
each strategy.
consectetuer adipiscing elit. Vivamus et
magna. Fusce sed sem sed magna
suscipit egestas.

Nash Equilibrium (NE)


Title

A players best strategy is


Loremthat strategy
ipsum that dolor
amet,
maximizessit
that players
payoff (utility),
consectetuer
adipiscing
elit. Vivamus et
knowing
the strategy's
of thesed magna
magna.
Fusce
sed sem
other
players.
suscipit
egestas.

DGDG

Lorem
ipsum
dolor
sit
amet,
consectetuer adipiscing elit. Vivamus et
magna. Fusce sed sem sed magna
suscipit egestas.

2-players Zero-Sum
games
Penny Matching:

Each of the two players has a penny.

Two players must simultaneously choose whether


to show the Head or the Tail.

Both players know the following rules:


-If two pennies match (both heads or both
tails) then player 2 wins player 1s penny.
-Otherwise, player 1 wins player 2s penny.

Title

Lorem
ipsum
dolor
sit
amet,
consectetuer adipiscing elit. Vivamus et
magna. Fusce sed sem sed magna
DGDG
suscipit egestas.
Player 2
Lorem
ipsum
dolor Head
sit
amet,
Tail
, Vivamus
1
1 , -1
consectetuer adipiscing
elit.
et
Head -1
Player 1
-1 -1
, 1
magna. Fusce sed Tailsem1 ,sed
magna
suscipit egestas.

Prisoners Dilemma
Title

No communication:
- Strategies must be undertaken without
Lorem
ipsum
dolor
sit
amet,
the full knowledge of what the other
consectetuer adipiscing elit. Vivamus et
players (prisoners) will do.

magna. Fusce sed sem sed magna


DGDG
suscipit
egestas.
Players (prisoners) develop dominant strategies
Lorem
but are notipsum
necessarilydolor
the best one.
sit
amet,
consectetuer adipiscing elit. Vivamus et
magna. Fusce sed sem sed magna
suscipit egestas.

Payoff Matrix for


Prisoners Dilemma
Ted

Title

Confess

Not Confess

Lorem
ipsum
dolor
sit1 year
amet,
for
consectetuer adipiscing
elit.
et
Bill
Both get
5 Vivamus
ConfessFusce sed years
magna.
sem sed
magna
10 years
for
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Ted
suscipit egestas.
Bill
10
years forsit
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ipsum
dolor
amet,
Bill
Both get 3
consectetuer
adipiscing
elit. Vivamus et
Not Confess
1 year for
years
magna. Fusce sed sem
sed magna
Ted
suscipit egestas.

An Example of
Mixed Strategy game
Title
A

Lorem
ipsum
dolorB
sit Bamet,
doesnt
believes
consectetuer adipiscing
elit. Vivamus et
believe
B
magna. Fusce sed sem sed magna
DGDG
A bluffs
1
0
suscipit egestas.
Lorem
sit
amet,
Aipsum
doesnt dolor
0
0.5
bluff
consectetuer
adipiscing elit. Vivamus et
magna. Fusce sed sem sed magna
suscipit egestas.

Now lets Play This Game


Pirate Game
B

Title
C

Lorem
ipsum
dolor
sit
amet,
consectetuer adipiscing elit. Vivamus et
A
magna. Fusce sed sem sed magna
DGDG
suscipit egestas.
Lorem
ipsum
dolor
sit
amet,
consectetuer adipiscing elit. Vivamus et
magna. FusceD sed E
sem sed magna
suscipit egestas.

Nashs Equilibrium
Title

This equilibrium occurs when each players


strategy is optimal, knowing the strategy's of the
other players.

Lorem
ipsum
dolor
sit
amet,
A players best strategy is that strategy that
consectetuer
elit.
Vivamus
et
maximizes adipiscing
that players payoff
(utility),
knowing
the other players.
magna.the strategy's
Fusce ofsed
sem sed magna
DGDG
suscipit
Soegestas.
when each player within a game follows their
strategy, a Nash equilibrium will occur.
Lorem best ipsum
dolor
sit
amet,
consectetuer adipiscing elit. Vivamus et
magna. Fusce sed sem sed magna
suscipit egestas.

Definition: Nash
Equilibrium
Title
others
Lorem
ipsum
dolor
sit Given
amet,
choices, player i
cannot be better-off
consectetuer adipiscing elit. Vivamus
et
if she deviates from
magna. Fusce sed sem seds * magna
DGDG
suscipit egestas.
Lorem
ipsum
dolor
sit
amet,
consectetuer adipiscing elit. Vivamus et
magna. Fusce sed sem sed magna
suscipit egestas.
i

Nashs Equilibrium cont.:


Bayesian Nash Equilibrium

The Nash Equilibrium of the imperfectTitle


information game
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sit
amet,
A Bayesianipsum
Equilibriumdolor
is a set of strategies
such
that each playeradipiscing
is playing a best
given
consectetuer
elit.response,
Vivamus
et
a particular set of beliefs about the move by
magna.
Fusce sed sem sed magna
nature.
DGDG
suscipit egestas.
All players have the same prior beliefs about the
Lorem
ipsum
dolor
sit
amet,
probability distribution on natures moves.
consectetuer adipiscing elit. Vivamus et
So for example, all players think the odds of player 1
magna.
Fusce
sed
magna
being of a
particularsed
type is sem
p, and the
probability
of her
being the
other type is 1-p
suscipit
egestas.

Refrences

Title Thinking
Dixit and Nalebuff:
Strategically
Lorem
ipsum
dolor
sit
amet,
Dutta:
consectetuer adipiscing elit. Vivamus et
magna. Fusce sed sem sed magna
DGDG
Strategies
and Games: Theory
suscipit egestas.
and Practice
Lorem
ipsum
dolor
sit
amet,
consectetuer
adipiscing elit. Vivamus et
www.gametheory.net
magna. Fusce sed sem sed magna
suscipit egestas.