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The purpose of the IMPACTS presentation series is to effectuate knowledge transfer concerning topical mathematical and scientific issues. Significant published works form the basis for much of the presentation series, and these works are interpreted and presented by recognized leaders in the topic area. The presentation series is made possible through the generous support of IMPACTS.

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knowledge transfer concerning topical mathematical and scientific

issues. Significant published works form the basis for much of the

ppresentation series, and these works are interpreted

p and ppresented

by recognized leaders in the topic area. The presentation series is

made possible through the generous support of IMPACTS.

Game Theory

then what exactly are the others here for? ”

- George Carlin

What is Game Theory?

y Game Theory: The study of situations involving competing interests,

modeled in terms of the strategies, probabilities, actions, gains, and losses

of opposing players in a game. A general theory of strategic behavior with a

common feature of Interdependence.

winning, given various strategies.

- Each person pays for their own meal – a simple decision problem

- Before the meal, every person agrees to split the bill evenly among them – a game

A Little History on Game Theory

y John von Neumann and Oskar Morgenstern

- Theory

Th off Games

G andd EEconomic BBehaviors

h

John Nash

- "Equilibrium points in N-Person Games", 1950, Proceedings of NAS.

"The Bargaining Problem", 1950, Econometrica.

"Non-Cooperative Games", 1951, Annals of Mathematics.

Howard W.

W Kuhn – Games with Imperfect information

Reinhard Selten (1965) -“Sub-game Perfect Equilibrium" (SPE) (i.e.

elimination by backward induction)

John C. Harsanyi - "Bayesian Nash Equilibrium"

Some Definitions for Understanding

G

Game theory

th

y Players-Participants of a given game or games.

y Rules-Are the guidelines and restrictions of who can do what and when they can do it

within a given game or games.

y Payoff-is

P ff i theh amount off utility

ili (usually

( ll money)) a player

l wins

i or lloses at a specific

ifi stage

of a game.

y Strategy-

gy A strategy

gy defines a set of moves or actions a player

p y will follow in a given

g

game. A strategy must be complete, defining an action in every contingency, including

those that may not be attainable in equilibrium

y Dominant Strategy

gy -A strategy

gy is dominant if,, regardless

g of what anyy other players

p y

do, the strategy earns a player a larger payoff than any other. Hence, a strategy is

dominant if it is always better than any other strategy, regardless of what opponents may

do.

Important Review Questions for Game

Theory

Th

Strategy

St t

y Who are the players?

y What strategies are available?

y What are the payoffs?

g

y What is the time-frame for decisions?

y What is the nature of the conflict?

y What is the nature of interaction?

y What information is available?

Five Assumptions Made to Understand

Game Theory

1. Each decision maker ("PLAYER“) has available to him two or more well-specified

choices or sequences of choices (called "PLAYS")

PLAYS ).

end-state (win, loss, or draw) that terminates the game.

3. A specified payoff for each player is associated with each end-state (a ZERO-SUM

game means that the sum of payoffs to all players is zero in each end-state).

4. Each decision maker has perfect knowledge of the game and of his opposition; that is,

he knows in full detail the rules of the game as well as the payoffs of all other players.

5. All decision makers are rational; that is, each player, given two alternatives, will select

the one that yields him the greater payoff.

Cooperative Vs.

Vs Non-Cooperative

Non Cooperative

y Cooperative Game theory has perfect communication

andd perfect

f contract enforcement.

f

A non-cooperative

ti game is

i one in

i which

hi h players

l are

unable to make enforceable contracts outside of those

specifically

p y modeled in the ggame. Hence, it is not defined

as games in which players do not cooperate, but as games

in which any cooperation must be self-enforcing.

I t d

Interdependence

d off Player

Pl Strategies

St t gi

1) Sequential – Here the players move in sequence, knowing

the other players’ previous moves.

- To look ahead and reason Back

2) Simultaneous

S l – Here

H the h players

l act at the

h same time, not

knowing the other players’ moves.

- Use Nash Equilibrium to solve

Simultaneous-move Games of Complete

Information

S1 S2 ... Sn

For each p

player,

y , a set of strategies/actions

g /

{Player 1, S1, Player 2,S2 ... Player Sn

Sn}

strategies, or for each player, preferences over the combinations

of the strategies

ui(s1, s2, ...sn), for all s1∈S1, s2∈S2, ... sn∈Sn

Nash’s Equilibrium

y This equilibrium

q occurs when each player’s

p y strategy

gy is optimal,

p , knowingg

the strategy's of the other players.

y A player’s best strategy is that strategy that maximizes that player’s payoff

(utility), knowing the strategy's of the other players.

y So when each player within a game follows their best strategy, a Nash

equilibrium will occur.

Logic Logic

Definition: Nash Equilibrium

In the normal-form

normal form game {S1 , S2 , ..., Sn , u1 , u2 , ...,

un}, a combination of strategies (s1*,...,sn* ) is a Nash

equilibrium if, for every player i, G e others’

Given ot e s

ui (s1*,...,si*−1, si*, si*+1,...,sn* ) choices, player i

cannot be better-off

≥ ui (s1*,...,si*−1, si , si*+1,...,sn* ) if she deviates from

si *

for all si ∈ Si . That is, si* solves

Maximize ui (s1*,...,si*−1, si , si*+1,...,sn* )

Subject to si ∈ Si

Nash’s Equilibrium cont.:

B

Bayesian

i N

Nash

h Equilibrium

E ilib i

y The Nash Equilibrium of the imperfect-information game

p y g a best response,

playing p ggiven a pparticular set of beliefs about the move

by nature.

y All p

players

y have the same pprior beliefs about the pprobabilityy distribution

on nature’s moves.

– So for example, all players think the odds of player 1 being of a particular type is p,

and the probability of her being the other type is 1-p

B

Bayes’

’ Rule

R l

• A mathematical rule of logic explaining how you should change

your beliefs

b li f in

i light

li ht off new information.

i f ti

• Bayes

Bayes’’ Rule:

P(A|B) = P(B|A)*P(A)/P(B)

• To use Bayes

Bayes’’ Rule,

Rule you need to know a few things:

– You need to know P(B|A)

– You also need to know the probabilities of A and B

Examples of Where Game

Theo Can Be Applied

Theory

y Zero-Sum Games

y Prisoner’s Dilemma

y Non-Dominant Strategy moves

y Mixing Moves

y Strategic Moves

y Bargaining

g g

y Concealing and Revealing Information

Zero-Sum Games

Penny Matching:

y Each of the two players has a penny.

y Two players must simultaneously choose whether to show the Head or the Tail.

y Both

B h players

l kknow the

h ffollowing

ll i rules:

l

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

-Otherwise, player 1 wins player 2’s penny.

Player 2

Head Tail

Head -1 , 1 1 , -1

Player 1

Tail 1 , -1 -1 , 1

Prisoner’s Dilemma

y No communication:

- Strategies must be undertaken without the full

knowledge of what the other players (prisoners) will do.

necessarily the best one.

one

Payoff Matrix for Prisoner’s Dilemma

Td

Ted

Confess Not Confess

1 year for

Confess

Both g

get 5 Bill

years 10 years for

Bill Ted

10 years for

Not Confess Bill Both g

get 3

1 year for years

Ted

Solving Prisoners’ Dilemma

y Confess is the dominant strategy for both Bill and Ted.

y D

Dominatedd strategy

-There exists another strategy which always does better regardless of other players’

choices

-(Confess Confess) is a Nash equilibrium but is not always the best option

-(Confess,

Players Ted

Strategies C f

Confess Not Confess

f

Not Confess -10

10,

,-1 -3,-3

Payoffs

Non Dominant strategy games

Non-Dominant

y There are manyy games

g when players

p y do not have dominant strategies

g

strategy

strategy if a player depends

on the other player’s strategy, he has no dominant strategy.

Non Dominant strategy games

Non-Dominant

Ted

Confess

2 years for Ted 4 years for Ted

Bill

9 years for Bill 5 years for Bill

Solution to Non-Dominant

st ateg games

strategy

Ted Confesses Ted doesn’t confess

Bill Bill

Best Strategies

your best strategy will depend on the other players

move.

Examples of Where Game

Theo Can Be Applied

Theory

Mixing Moves

Examples in Sports (Football & Tennis)

Strategic Moves

War –Cortes Burning His Own Ships

Bargaining

Splitting a Pie

Concealing and Revealing Information

Bluffing in Poker

Applying Game Theory to NFL

y Solving a problem within the Salary Cap.

y How should each team allocate their Salary cap. (Which

position should get more money than the other)

y The Best strategy is the most effective allocation of the

team’s money to obtain the most wins.

y Correlation can be used to find the best way to allocate

the team’s money.

What is a correlation?

y A correlation examines the relationship

p between two measured

variables.

- No manipulation by the experimenter/just observed.

- E.g., Look at relationship between height and weight.

y You can correlate any two variables as long as they are numerical

((no nominal

i l variables)

i bl )

y Is there a relationship between the height and weight of the students

in this room?

- Of course! Taller students tend to weigh more.

Salaries vs

vs. Points scored/Allowed

Position Correlatio T-test Position Correlatio T-test

n n

RB .27 2.67 DE .25 2.52

k .25 2.52 CB .15 1.48

TE .17

17 1 74

1.74 S .06

06 .61

61

WR -.03 -.30 P 0 0

spending to team points scored. Tight Ends also show some

modest relationship between spending and points.

The Defensive Linemen are the top salary correlators,

correlators with

cornerbacks in the second spot

Total Position spending vs.

vs Wins

Position Wins Points Scored Points Allowed Total Position

K 0.27 0.27 0.17 0.27

CB 0.17 0.12 0.12 0.23

TE 0.16 0.2 0.15 0.17

OL 0.15 0.02 0.2 0.08

RB 0.11 0.11 -0.03 0.26

QB 0.1 0.08 0.08 0.04

DE 0.08 -0.14 0.17 0.16

P 0.08 0.01 0.03 0.04

LB 0.05 -0.08 0.15 -0.02

S 0.03 0.02 0.05 0.04

DT -0.02 -0.01 0.02 -0.04

WR -0.08

0 08 -0.01

0 01 -0.04

0 04 0 01

0.01

also

What this means

y NFL teams are not very successful at delivering results for

the big money spent on individual players.

y There's

Th ' high

h h riskk in general,

l bbut more so at some positions

over others in spending large chunks of your salary cap space.

Future Study

y Increase the Sample size.

y Cluster Analysis

y Correspondence analysis

y Exploratory Factor Analysis

Conclusion

There are many advances to this theory to help describe and

prescribe the right strategies in many different situations.

Although the theory is not complete, it has helped and will

continue to help many people,

people in solving strategic games.

games

References

y Nasar, Sylvia (1998), A Beautiful Mind: A Biography of John Forbes Nash, Jr.,Winner of the Nobel Prize

in Economics, 1994. Simon and Schuster, New York.

y Rasmusen, Eric (2001), Games and Information: An Introduction to Game Theory, 3rd ed. Blackwell,

Oxford.

y Gibbons, Robert (1992), Game Theory for Applied Economists. Princeton University Press,

Princeton NJ.

Princeton, NJ

y Mehlmann, Alexander. The Games Afoot! Game Theory in Myth and Paradox. AMS, 2000.

y Wiens, Elmer G. Reduction of Games Using Dominant Strategies.Vancouver: UBC M.Sc. Thesis,

1969.

y H. Scott Bierman and Luis Fernandez (1993) Game Theory with Economic Applications, 2nd ed.

(1998), Addison-Wesley Publishing Co.

y D. Blackwell and M. A. Girshick (1954) Theory of Games and Statistical Decisions, John Wiley &

S

Sons, New

N Y York.

k

y NFL Official, 2004 NFL Record and Fact Book; Time Inc. Home Entertainment, New York,

New York.

Game Theory

then what exactly are the others here for? ”

- George Carlin

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