ILOILO STATE COLLEGE OF FISHERIES

College of Education
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Tiwi, Barotac Nuevo, Iloilo

Game Theory
Ces’t La Vie C. Asumbra

Game theory
Game Theory was pioneered in the 1950s by Mathematician John Nash. The game theory
isn’t about games the way we normally think about them. Instead, a game is any interaction
between multiple people in which each person’s payoff is affected by decisions made by others.
Game theory is incredibly wide-ranging, and it’s used all the time by economists, political
scientists, biologists, military tacticians, psychologists and even us teachers if we know the core
idea of this theory.

Two main branches of Game Theory

Non-cooperative game theory or Competitive Game Theory
Non-cooperative game theory covers competitive social interactions, where there will be
some winners, some losers. The prisoner’s dilemma is probably the most famous thought
experiment in competitive game theory. It describes a game, a social interaction, that involves
two prisoners.
Prisoner’s Dilemma Illustration.
Let’s say sir Jojo and sir Wilfred. They were arrested fleeing from the scene of a
crime, and based on the evidence the police have already collected, they’re going to have
to spend two years in jail. But the DA wants more. So he offers them both a deal. If you
confess the crime, and your partner does not, you’ll be granted immunity for cooperating.
You will be free to go. Your partner, though, will serve ten years in jail. If you both
confess, and dish up loads of dirt about each other, then you will both end up spending
five years in jail. But if neither of you confess, you’ll both spend only two years in jail.
Those are their options. Then Sir Jojo and Sir Wilfred w ere split up. They don’t know
what their partner is going to do. They have to make their decisions independently. Now,
Sir Jojo and sir Wilfred had some wild times stealing diamonds or what so ever, but they
don’t have any special loyalty to each other. They’re not brothers, they’re hardened
criminals. Sir Jojo has no reason to think that sir Wilfred wont stab him in the back and
vice versa. Competitive game theory arranges their choices and their potential
consequences into a grid that looks like this.

If both Sir Jojo and sir Wilfred choose not to confess, they’ll both serve two
years. In theory, this is the best overall outcome. Combined, they would spend as little
time in prison as possible. But, that immunity sounds pretty good. If one of them chooses
to confess, and the other doesn’t, the snitch gets to walk. Then the math looks like this.
That’s the problem. Sir jojo and sir Wilfred have no reason to trust each other. Sir Jojo
might consider not confessing, because if sir Wilfred doesn’t confess either, they both
 ILOILO STATE COLLEGE OF FISHERIES
College of Education
GRADUATE STUDIES
Tiwi, Barotac Nuevo, Iloilo

only serve two years. If they could really trust each other, that would be their best bet.
But sir jojo can’t be sure that sir Wilfred won’t snitch. He has a lot to gain by confessing.
If sir wilfred does decide to confess, and sir jojo keeps silent, he’s risking ten years in
jail. While sir Wilfred goes free. Compared to that, the five years they’d get both turning
on each other doesn’t sound so bad. And that is the game theory’s solution, they should
both confess and rat each other out.
That square in the grid where they both confess is the only outcome that has
reached what’s known as Nash Equilibrium. This is a key concept in competitive game
theory. A player in a game has found Nash equilibrium when they make the choice that
leaves them better off no matter what their opponents decides to do.

If sir Jojo confesses and Sir Wilfred does not confess, he’s better off. He gets to
walk! By confessing, sir Jojo went from serving two years in prison to serving none. If
Sir Wilfred does confess, sir Jojo is still better off. If he kept his mouth shut, he’d be
spending ten years in prison. Now, he only has to serve five. Sure if sir jojo decides not to
confess, and sir Wilfred keeps his pinky promise too, they’ll both get out in two years.
But that is an unstable state. Because sir Jojo doesn’t trust sir Wilfred, he doesn’t know
what he’s going to do.

This is not a cooperative game. The players stand to gain from stabbing each other in the
back. The prisoner’s dilemma is just one example of a competitive game, but the basic idea
behind its solution applies to all kinds of situation. Generally, when you’re competing with
others, it makes sense to choose the course of action that benefits you the most no matter what
everyone else decides to do.

Cooperative game
Cooperative Game Theory is where every player has agreed to work together towards a
common goal. In game theory, a coalition is what you call a group of players in a cooperative
game. When it comes to cooperative games, game theory’s main question is how much each
player should contribute to the coalition, and how much they should benefit from it. In other
words, it tries to determine what’s fair. Where competitive game theory has the Nash
Equilibrium, cooperative game theory has what’s called the Shapley value. Shapley value is a
method of dividing up gains or costs among players according to the value of their individual
contributions.
Cooperative Game Theory Axioms
Number 1, the contribution of each player is determined by what is gained or lost by
removing them from the game. This is called their marginal contribution. Let’s say that every
day this week you and your friend are baking cookies. When you get sick for a day, probably
 ILOILO STATE COLLEGE OF FISHERIES
College of Education
GRADUATE STUDIES
Tiwi, Barotac Nuevo, Iloilo

from eating too many cookies, the group produces fifty fewer cookies that they did on the days
that you were there. So your marginal contribution to the coalition, every day is fifty cookies.
Number 2, interchangeable players have equal value. If two parties bring the same things
to the coalition, they should have to contribute the same amount, and should be rewarded for
their contributions equally. Like two people order the same thing in the restaurant, they should
pay the same amount of bill. If two workers have the same skills, they should receive the same
wages.
Number 3, dummy players have zero value. In other words, if a member of a coalition
contributes nothing, then they should receive nothing. This one’s controversial. It could mean
that if you go to dinner with your friends, but you don’t order anything, you shouldn’t have to
chip in when the bill comes. Which seems fair, in that case. But it could also mean that if
somebody can’t contribute to the work force, they shouldn’t receive any compensation. The
thing is, there are good reasons why somebody might not be able to contribute, maybe they’re on
maternity leave or they got in an accident or they have some kind of disability. It situations like
that, the coalition might want to pay something out to them inspite of them not being able to
contribute.
Number 4, says that if a game has multiple parts, cost or payment should be decomposed
across those parts. This just means that for example, if you did a lot of work for the group on
Monday, but you slacked off on Tuesday, your reward on each day should be different. Or if you
ordered a salad one night, but a steak dinner the next, you probably should pay more on the
second night.
Shapley Value
Shapley Value is divvying up payments to all of the players that satisfies all of those four
axioms mentioned earlier.
The Shapley Value can be expressed mathematically like this.

But we can break down the concepts into something less complicated using this
illustration.
You’re baking cookies and your friend is baking cookies. In an hour you can bake
ten cookie when you are working alone. Your friend though is like a cookie wizard, an in
the same hour, working alone, he can bake 20 cookies. When you decide to team up.
When you’re working together, you streamline your process. One person can mix up all
the batter at once or whatever, which saves you a lot of time. So after an hour, you have
forty cookies. But if you’d each been working alone, you’d only have made 30 cookies in
the same hour. Then you sell each of those cookies for 5 pesos each. Now you got 200
pesos. Then how do you divide the loot? The Shapley equation tells you to think about it
like this. If you take the fact that you can make 10 cookies an hour, and subtract them
from the total, that gives your friend credit for the other thirty cookies. That’s what
happens when you remove your friend from the system. Their marginal contribution to
you is 30 cookies. But if you take the fact that your friend can make 20 cookies an hour,
and subtract that from the total, that gives you credit for twenty cookies. Because if you
 ILOILO STATE COLLEGE OF FISHERIES
College of Education
GRADUATE STUDIES
Tiwi, Barotac Nuevo, Iloilo

removed from your friend’s cookie-making system, your marginal contribution to them is
20 cookies. In the first case, your value to the coalition was only ten cookies. But in the
second case, your value to the coalition is twenty cookies. According to the Shapley
value equation, you should average those two numbers together. 10 + 20 = 30, divided by
2 is 15. So the Shapley value equation says that you should get 15 cookies the you can
sell it for 5 pesos you will have 75 pesos. And your friend should get 125 pesos.

This method can be scaled up to coalitions with hundreds of players, by finding their
marginal contributions to every other player and then calculative the average of all those
numbers. Interactions can get much more complicated than the Prisoner’s Dilemma or baking
cookies, so there’s a lot more to game theory.
But it comes down to this. In a competitive situation, game theory can tell you how to be
smart. And in a cooperative situation, game theory can tell you how to be fair.