Payoff Functions:

A payoff is the outcome of a game that depends on the strategies selected by the
participants. The art of modelling in game theory lies in how we define the payoff function. It is
basically a relation between the functional parameters or strategies adopted through which we
can arrive at the defined outcome.
For example: the strategies taken up by all the players in a football match is a function of the
strategies of individual players in the match and the payoff function tells us about the individual
payoff of each player. Payoff functions are written as functions of the strategies directly (s1, s2).
When each participant picks a plan, a physical consequence is usually the result. The only thing
that matters about each physical consequence is how much payoff it brings in for all players. As
a result, we disregard physical results in favor of payoffs.
Beliefs:
It is basically a predetermined assessment of the player about the strategies of others in a
game. To quantify it, we assign probabilities to it as to how the other players are going to play.
The probability of a belief is conventionally denoted by θ and written as θ1 = (p1, p2, p3). Beliefs
may not be accurate.
Expected payoff:
In a game, the payoffs reflect a player's (constant) willingness to stake when faced with
specific odds. Players are thus risk neutral in terms of payoffs, which may skew monetary
quantities. Expected-payoff values are another term for such payoffs. In one-player games,
expected-payoff functions are also used to simulate decisions under uncertainty. Players can take
better decision depending on the expected-payoff of the game. The higher the payoff the better
the strategy.
Example: Expected-payoff E(x) = p1(O1) + p2(O2) + …......
Where, p1, p2, …... are the assigned probabilities of the belief and O1, O2, …... are the
respective outcomes.
Rationality Assumption:
The assumption that players pick their actions or tactics rationally in the sense of
expected payoff theory, and that the fact that they do so is common knowledge in the sense that
every player knows it, and so on, is one of game theory's conventional knowledge and rationality
assumptions. Even when they are capable of grasping the logic of the argument, empirical data
shows that human decision makers do not always follow the backward reasoning path. It is all
cognitive in nature and is taken so as to increase their payoffs.
Common knowledge of rationality:
We say players are playing a game when two or more agents intentionally interact in the sense
that each knows how the outcomes for them are influenced not just by their own actions
(strategies), but also by the activities of the others. The game is a common knowledge of
rationality (CKR) game, and each player is rational while acting instrumentally to maximize