REFLECTION NOTES

SESSION #1 – KEY HIGHLIGHTS

 Game Theory – It is the study of models of strategic interaction among rational-
decision makers.
 Rational-decision makers are the players in a competitive setting who take optimal
decisions based on what the other player will do and how their actions can affect the
outcome.
 Elements of a game – list of players, set of possible actions, available information, the
outcome of actions, and preferences over the set of actions.

SESSION #2 – NOTES
In Game Theory, players strategically interact to either cooperate or enter into a conflict
while taking a rational decision. In this session, we will understand the normal form (or
strategic form), which describes a game using a matrix, with the help of Prisoner's Dilemma.
Further, we will focus on the three major tensions of strategic interaction.

Prisoner's Dilemma: The prisoner's dilemma is one of the most well-known concepts in
modern game theory. It is a paradox in decision analysis in which two individuals acting in
their self-interests do not produce the optimal outcome. The typical prisoner's dilemma is set
up in such a way that both parties choose to protect themselves at the expense of the other
participant. As a result, both participants find themselves in a worse state than if they had
cooperated in the decision-making process.

Both the players will choose simultaneously i.e.,

each player is uncertain about other’s actions, as
opposed to in a sequential game. For example,
here the players need to decide if they are willing
to cooperate by not accepting the crime or defect
about it by disclosing the crime. If both cooperate, Basic Terminologies: let's try to
sentence is reduced by 2 years each. If neither understand the basic terminology
cooperate, sentence is reduced by a year each. related to the game theory with the help
However, if one of them cooperate while the other of this model:
doesn’t, the one who cooperates will walk free Strategy: A strategy is defined
and the other will be sentenced for 3 years. as a complete contingent plan
for a player in a game. It is a
full specification of a player's behavior about what they would do at each information
set. For example, in this case, the player's strategy space can be either to choose C or
 D, depending upon the information that he has and what he predicts the other player
can choose to depend upon his understanding of another player.
Strategy Space: A strategy space (or strategy set), Si, is a set comprising of each of
the possible strategies of player I in the game. e.g., in the Prisoners’ dilemma, S1 =
{C, D}, S2 = {C, D}
Strategy Profile: It is a vector of strategies, one for each player, s = (s1, s2). The set
of strategy profiles, S = S1 × S2
For Example, in the Prisoners’ dilemma, S = {(C, C), (C, D), (D, C), (D, D)}
Normal Form: A game in normal form (strategic form) consists of a set of players,
strategy spaces for the players, and their payoff functions.
Belief: A belief is a player's assessment of the strategies of others in the game,
basically what one player thinks about the other player. To model beliefs, probability
is used. For example, (p, 1-p) constitutes a probability distribution over {C, D} in the
Prisoners' dilemma.
For example, if player 2 assigns the probability of 1/3 to C and 2/3 to D, then the
expected payoff will be E(C) – 1/3*2 + 2/3*0 = 2/3 and E(D) – 1/3*3 + 2/3*1 = 5/3
Thus, player 2 will choose to defect based on his beliefs.

Assumptions: The game theory model usually rests on a few basic assumptions, which are
discussed below:
 Rationality: players usually form a belief about other player's strategies and act
accordingly to select a strategy in a way that maximizes their expected payoffs.
 Common Knowledge*: it implies that there is complete and imperfect knowledge.
Under this assumption, it is ensured that players have a shared understanding of the
entire game. The rules (or facts) of the game, as well as each player's payoffs, are
common knowledge.
*Note: Information asymmetry and common knowledge can co-exist.

Strategic Tensions: There are three major tensions of strategic interaction, i.e., the conflict
between individual and group interests, strategic uncertainty, and inefficient coordination.
Let's understand these in detail.