Game Theory

Presented by:
Aditya Nandeshwar
Aniketh Mahadik
Atreay Kukanur
Fakkiresh Noorshetter
Introduction:
Developed by Prof. John Von Neumann and Oscar Morgenstern in 1928 game theory is a body of
knowledge that deals with making decisions when two or more rational and intelligent opponents are
involved under situations of conflict and competition.

The approach of game theory is to seek to determine a rival’s most profitable counter-strategy to one’s own
best moves. It helps in determining the best course of action for a firm in view of the expected counter
moves from the competitors.
Flowchart:
Classification:

Two-Person Game – A game with 2 number of players.

N-Person Game – A game with N number of players, where >2.
Zero-Sum Game – A game in which sum of amounts won by all winners is equal to sum
of amounts lost by all losers.
Non-Zero Sum Game – A game in which the sum of gains and losses is not equal.
Pure-Strategy Game – A game in which the best strategy for each player is to play one
strategy throughout the game.
Mixed-Strategy Game – A game in which each player employs different strategies
at different times in the game.
Saddle Point Method:
● At the right of each row, write the row minimum and underline the largest of them.
● At the bottom of each column, write the column maximum and underline the smallest
of them.
● If these two elements are equal, the corresponding cell is the saddle point and the
value is value of the game.
Example: The payoff matrix of a two person zero sum game is:-
Dominance Method
Principle of Dominance:

The Principle of Dominance states that if the strategy of a player dominates over the other strategy in all
condition, the later strategy can be ignored because it will not affect the solution in any way. A strategy dominates
over other only if it is preferable over other in all conditions.

Following rules are used to reduce the size of pay-off:

Rule 1: If all the elements in a row of a pay-off matrix are “<” or “=” to the corresponding elements of other row
then comparative row will be deleted

Rule 2: If all elements in a column in a pay-off matrix are “>” or “=” to the corresponding elements of other
column then comparative column will be deleted.

These rules could be better understood with the help of the following example:
In this, B3 is dominating B4 which gives lesser loss in all conditions. So, B4 is redundant
ignoring this, the effective pay-off will be:
Now, the saddle point is where A’s optimum strategy is A1 and of B is B2 and value of game is 6 on
following the rule of dominance. so, A cannot gain more than 6 and B cannot loose less than 6.

Arithmetical Method:
This method is used for 2*2 games which do not have any Saddle Point. As it does not have any saddle point so
mixed strategy has to be used.

Players selects each of the available strategies for certain proportion of time i.e., each player selects a strategy with
some probability.

It could be stated specifically with the help of following example:

As it can be seen that saddle point does not exist, we follow following method:
Let, p= probability that A uses strategy A1, q= probability that B uses strategy B1

So, 1-p= probability that A uses strategy A2, 1-q= probability that B uses strategy B2
If player B selects strategy A1 and player A selects the option with probabilities p and 1-p, then according to
given pay-off matrix, expected pay-off to player A will be:

3(probability of player A selecting Strategy A1) + 4(probability of player A selecting strategy A2)

= 3p+4(1-p).

If player B selects strategy A2 then expected pay-off to player A will be:

5p+1(1-p)

The probability should be such that expected pay-offs under both conditions are equal. So,

3p+4(1-p)=5p+(1-p) => p=3/5

Thus, player A selects strategy A1 with probability of 3/5 or 60% of the time and
strategy A2 is 40% of the time.
Similarly, expected pay-offs from player B can be computed as:

3q+5(1-q)=4q+1 =>q=4/5
Thus, player B selects strategy B1, 80% of the time and 20% of the time strategy
B2.
Value of the Game = (Expected profits to player A when player B uses strategy
A1)*(Probability player B use strategy B1) + (Expected profits to player A when
player B uses strategy A2)*(Probability player B use strategy B2)
So, Value of Game = [3q=4(1-p)]q+[5p+(1-p)](1-q)

=[3*3/5+4(1-3/5)]*4/5+[5*3/5+(1-3/5)](1-4/5)

=17/5*4/5+17/5*1/5

=17/5
Limitation of Game Theory:
1. The assumption that the players have the knowledge about their own pay-offs and
pay-offs of others is rather unrealistic. He can only make a guess of his own and his
rivals’ strategies.
2. As the number of maximum and minimax show that the gaming strategies becomes
increasingly complex and difficult. In practice, there are many firms in an oligopoly
situation and game theory cannot be very helpful in such situation.
3. The assumptions of maximum and minimax show that the players are risk-averse
and have complete knowledge the strategies. These do not seen practical.
4. Rather than each player in an oligopoly situation working under uncertain
conditions, the players will allow each other to share the secrets of business in order
to work out a collusion. Thus, the mixed strategies are also not very useful.
Conclusion:
Game theory is the formal study of conflict and cooperation between intelligent rational
decision-makers. It has been a powerful analytical tool to help us understand the
phenomena that can be observed when decision makers interact. Game theoretic models
have become increasingly sophisticated and in consequence, much more powerful and
useful. It has been successfully applied to a wide variety of disciplines including
economics, sociology, psychology, philosophy. Game theory has helped sharpen our
intuitions, allowing a ‘rational reconstructions’ of different ideas, norms, values among
agents (players) for significant philosophical expositions. At the end of discussion, we
would like to quote from British prominent writer Charles Lamb’s (1775-1834) famous
work Essays of Elia: ‘Man is a gaming animal. He must always be trying to get the better
in something or other’.
THANK YOU