Game Theory and its
Applications
ANSHUL BHATIA
ROLL NO - 253
21 NOV, 2010
What will we discuss?
Brief History of Game Theory
Payoff Matrix
Types of Games
Basic Strategies
Evolutionary Concepts
Limitations and Problems
Brief History of Game Theory
1913 - E. Zermelo provided the first theorem of game
theory
asserts that chess is strictly determined
1928 - John von Neumann proved the minimax theorem
1944 - John von Neumann / Oskar Morgenstern’s wrote
"Theory of Games and Economic Behavior”
1950-1953, John Nash describes Nash equilibrium
1972 - John Maynard Smith wrote
“Game Theory and The Evolution of Fighting”
Rationality
Assumptions:
humans are rational beings
humans always seek the best alternative in a set
of possible choices
Why assume rationality?
narrow down the range of possibilities
predictability
Utility Theory
Utility Theory based on:
rationality
maximization of utility
It is a quantification of a person's preferences with
respect to certain objects.
What is Game Theory?
Game theory is a study of how to mathematically
determine the best strategy for given conditions
in order to optimize the outcome
Game Theory
Finding acceptable, if not optimal, strategies in
conflict situations.
Abstraction of real complex situation
Game theory is highly mathematical
Game theory assumes all human interactions
can be understood and navigated by
presumptions.
Why is game theory important?
All intelligent beings make decisions all the time.
AI needs to perform these tasks as a result.
Helps us to analyze situations more rationally and
formulate an acceptable alternative with respect to
circumstance.
Types of Games
Sequential vs. Simultaneous moves
Single Play vs. Iterated
Zero vs. non-zero sum
Perfect vs. Imperfect information
Cooperative vs. conflict
Zero-Sum Games
The sum of the payoffs remains constant during
the course of the game.
Two sides in conflict
Being well informed always helps a player
Non-zero Sum Game
The sum of payoffs is not constant during the course
of game play.
Players may co-operate or compete
Being well informed may harm a player.
Games of Perfect Information
The information concerning an opponent’s move is
well known in advance.
All sequential move games are of this type.
Imperfect Information
Partial or no information concerning the opponent is
given in advance to the player’s decision.
Imperfect information may be diminished over time
if the same game with the same opponent is to be
repeated.
Key Area of Interest
Chance
Strategy
Prisoner’s Dilemma
15
Two suspects arrested for a crime
Prisoners decide whether to confess or not to confess
If both confess, both sentenced to 3 months of jail
If both do not confess, then both will be sentenced to
1 month of jail
If one confesses and the other does not, then the
confessor gets freed (0 months of jail) and the non-
confessor sentenced to 9 months of jail
What should each prisoner do?
Game Theory Jan 07, 2009
Prisoner’s Dilemma
Prisoner’s Dilemma
Games of Conflict
Two sides competing against each other
Usually caused by complete lack of information
about the opponent or the game
Characteristic of zero-sum games
Prisoner’s Dilemma
with Cooperation
Games of Co-operation
Players may improve payoff through
communicating
forming binding coalitions & agreements
do not apply to zero-sum games
Battle of Sexes
20
A couple deciding how to spend the evening
Wife would like to go for a movie
Husband would like to go for a cricket match
Both however want to spend the time together
Scope for strategic interaction
Game Theory Jan 07, 2009
Games
21
Normal Form representation – Payoff Matrix
Prisoner 2
Confess Not Confess
Confess -3,-3 0,-9
Prisoner 1
Not Confess -9,0 -1,-1
Husband
Movie Cricket
Wife
Movie 2,1 0,0
Cricket 0,0 1,2
Game Theory Jan 07, 2009
Nash equilibrium
22
Each player’s predicted strategy is the best response
to the predicted strategies of other players
No incentive to deviate unilaterally
Strategically stable or self-enforcing
Prisoner 2
Confess Not Confess
Confess -3,-3 0,-9
Prisoner 1
Not Confess -9,0 -1,-1
Game Theory Jan 07, 2009
Mixed strategies
23
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
probability
Game Theory Jan 07, 2009
Dynamic games
24
Sequential moves
One player moves
Second player observes and then moves
Examples
Industrial Organization – a new entering firm in the market
versus an incumbent firm; a leader-follower game in quantity
competition
Sequential bargaining game - two players bargain over the
division of a pie of size 1 ; the players alternate in making offers
Game Tree
Game Theory Jan 07, 2009
Economic applications of game theory
The study of oligopolies (industries containing only
a few firms)
The study of cartels, e.g., OPEC
The study of externalities, e.g., using a common
resource such as a fishery
The study of military strategies
The study of international negotiations
Bargaining
Auctions
26
Games of incomplete information
First Price Sealed Bid Auction
Buyers simultaneously submit their bids
Buyers’ valuations of the good unknown to each other
Highest Bidder wins and gets the good at the amount he bid
Nash Equilibrium: Each person would bid less than what the good
is worth to you
Second Price Sealed Bid Auction
Same rules
Exception – Winner pays the second highest bid and gets the good
Nash equilibrium: Each person exactly bids the good’s valuation
Game Theory Jan 07, 2009
Second-price auction
27
Suppose you value an item at 100
You should bid 100 for the item
If you bid 90
Someone bids more than 100: you lose anyway
Someone bids less than 90: you win anyway and pay second-price
Someone bids 95: you lose; you could have won by paying 95
If you bid 110
Someone bids more than 11o: you lose anyway
Someone bids less than 100: you win anyway and pay second-price
Someone bids 105: you win; but you pay 105, i.e., 5 more than what
you value
Game Theory Jan 07, 2009
Basic Strategies
1. Plan ahead and look back
2. Use a dominating strategy if possible
3. Eliminate any dominated strategies
4. Look for any equilibrium
5. Mix up the strategies
Conclusions
29
Mimics most real-life situations well
Solving may not be efficient
Applications are in almost all fields
Big assumption: players being rational
Can you think of “unrational” game theory?
Thank you!
Discussion
Game Theory Jan 07, 2009
