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

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DGDG • Lorem ipsum dolor sit amet. Vivamus et magna. consectetuer • Lorem In strategic games. maximize theirmagna. agents choose strategies that will Vivamus et return.given thesed strategies the other agents choose. sem sed magna suscipit egestas. Fusce sed sem sed magna suscipit egestas. Fusce adipiscing elit. consectetuer • The mathematics of human interactions adipiscing elit.What is Game Theory? Title • ipsum dolor sit amet. .

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

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

Key Elements of a game • Players: Who is interacting? • Lorem ipsum dolor sit amet. Fusce sed • magna What egestas. Vivamus et magna. Title . Vivamus et magna. sem sed Payoffs:suscipitare their incentives? DGDG • Lorem • ipsum dolor What do they know? Information: sit amet. Fusce sed • Rationality: How do they think? sem sed magna suscipit egestas. consectetuer adipiscing elit. consectetuer • Strategies: What are their options? adipiscing elit.

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

Fusce sed in the rows. DGDG value of the game is equal •The lower • Lorem to the maximum of the minimum values ipsum dolor sit amet. sem sed magna suscipit egestas. consectetuer ipsum dolor sit maximum values in the columns. Vivamus et magna. consectetuer adipiscing elit. Fusce sed Title sem sed magna suscipit egestas.Pure Strategies •The upper value of the game is equal • Lorem to the minimum of theamet. adipiscing elit. . Vivamus et magna.

Vivamus et magna. 7 10 7 . Vivamus et magna. Fusce sed 6 Maximum sem sed magna suscipit egestas. -12 consectetuer X2 -12 adipiscing elit.An Example: A TitleY2 Y1 Minimum B • Lorem ipsum dolor sit amet. Fusce sed X1 10 6 6 sem sed magna suscipit egestas. consectetuer adipiscing elit. DGDG • Lorem ipsum dolor sit 7amet.

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

Title • Lorem ipsum dolor sit amet. other players. knowing the strategy's of the sem sed magna suscipit egestas. consectetuer ipsum dolor maximizes that elit. Fusce sed sem sed magna suscipit egestas. consectetuer adipiscing elit.Nash Equilibrium (NE) A player’s best strategy is • Lorem that strategy that sit amet. Vivamus et magna. DGDG . Fusce sed adipiscing player’s payoff (utility). Vivamus et magna.

magna wins player 1’s penny. player 1 wins player 2’s penny. Vivamus etboth -If two pennies match (both heads or magna. Vivamus et magna. consectetuer dolor sit Both players know the adipiscing elit. 1 1 . DGDG -Otherwise. Tail 1 . Fusce sed tails) sem sed then player 2suscipit egestas.2-players Zero-Sum games Penny Matching: • • Each of the two players has a penny. -1 -1 . Fusce sed sem sed magna Player 1 Head -1 . consectetuer Player 2 Head Tail adipiscing elit. • Lorem ipsum dolor sit amet. 1 . Title • • Lorem ipsum following rules: amet. Two players must simultaneously choose whether to show the Head or the Tail. -1 suscipit egestas.

without the full knowledge of et magna. Vivamus et magna. consectetuer • Players (prisoners) develop dominant strategiessed adipiscing elit. Fusce sed adipiscing elit.ipsum dolor undertaken consectetuer • Lorem Strategies must be sit amet. sem sed magna suscipit egestas. DGDG • Lorem ipsum dolor sit amet. sem sed magna suscipit egestas.Prisoner’s Dilemma • Title No communication: . Fusce but are not necessarily the best one. . Vivamus what the other players (prisoners) will do.

DGDG Bill . consectetuer 1 year for Bill adipiscing elit.Payoff Matrix for Prisoner’s Dilemma Title • Confess Ted Not Confess Lorem ipsum dolor sit amet. 1 et magna. Confess VivamusBoth get 5 et magna. 10 years for Fusce sed sem sed magna suscipit egestas. Fusce sed adipiscing elit. years Ted • Lorem ipsum dolor 10 years for Bill consectetuer sit amet. Vivamusyear for Ted Both get 3 Not Confess years sem sed magna suscipit egestas.

consectetuer A doesn’t adipiscing elit. Fusce sed 0. believe sed Fusce B sem sed magna suscipit egestas. A . consectetuer B doesn’t B believes adipiscing elit. DGDG A bluffs 1 0 • Lorem ipsum dolor sit amet. Vivamus et magna.An Example of Mixed Strategy game Title • Lorem ipsum dolor sit amet. Vivamus et 0 magna.5 bluff sem sed magna suscipit egestas.

consectetuer adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas. DGDG • Lorem ipsum dolor sit amet.Now let’s Play This Game Pirate Game B Title C • Lorem ipsum dolor sit amet. D E . Fusce sed A sem sed magna suscipit egestas. Vivamus et magna. consectetuer adipiscing elit.

best strategy is magna. Vivamus et magna. Title . • Lorem ipsum dolor sit amet.Nash’s Equilibrium • Lorem ipsum dolor sit amet. that • A sem sed maximizessuscipit egestas. magna DGDGthat player’s payoff (utility). knowing the strategy's of the other players. Fusce sed • So when each player within a game follows their sem sed best strategy. consectetuer adipiscingplayer’s Vivamus et that strategyFusce sed elit. consectetuer adipiscing elit. will occur. knowing the strategy's of the other players. a Nash egestas. magna suscipit equilibrium • This equilibrium occurs when each player’s strategy is optimal.

.... sVivamus et) magna.. 1.i Vivamus et magna.. si* sit* Lorem ipsum si*dolor1.. Fusce sed  ( s1 .. Fusce sed sem sed magna suscipit egestas.. samet.. consectetuer • Lorem ipsum si 1. choices.... * Given others’ ui ( s1 .. u1 . * * un}. player i cannot be better-off if she deviates from si* .. a combination of strategies ( s1 . .. sn sem i  S That is..... DGDG* * * * Maximize ui ( s1 .. u2 . si*1. si .. consectetuer Title • * * adipiscingui elit.Definition: Nash Equilibrium In the normal-form game {S1 .. for every player i. . si . S2 . i* solves for all ssedi ....... sn ) is a Nash equilibrium if.magnassuscipit egestas. si* . sn ) amet....dolor si 1.. sit n ) Subject to i  S adipiscing selit.. Sn . i*1.

Fusce adipiscing elit. Fusce sed – So for example. such that each player is playing a Vivamus et magna.Nash’s Equilibrium cont.suscipit egestas. best response. DGDGsame prior beliefs about the probability – All players have the • Lorem ipsum dolor sit amet. given a particular set ofsed beliefs about the move by nature. adipiscing elit. Vivamus et magna. being the other type is 1sed magna and the probability of her p . all players think the odds of player 1 being of a semparticular type is p. sem sed magna suscipit egestas.: Bayesian Nash Equilibrium • The Nash Equilibrium of the imperfectTitle information game • – A Bayesian Equilibrium is a set of strategies consectetuer Lorem ipsum dolor sit amet. consectetuer distribution on nature’s moves.

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

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