GAME
THEORY
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GAME THEORY
Game Theory is the science of strategy.
Attempts to determine actions of the other players.
-mathematically and logically
Concepts aimed at decision making in several
situations
- Competition
- Conflict
- Cooperation
- Interdependence
Game Theory employs games of strategy such as chess
but not of chance such as rolling a dice.
NATURE AND SCOPE
The essential nature of game theory is that it
involves strategic behavior, which means
interdependent decision-making.
The essence of these interdependent decision-making
situations is that when A makes a decision, it will
consider the reactions of their persons or firms to its
different strategies , usually assuming that they act
rationally and how these reactions will affect their
own utility or profit.
ELEMENTS OF A GAME
1. Players – a strategic decision-maker within the
context of the game.
2. Strategies – are those in which each person, in
deciding what actions to take, must consider how
others might respond to that action.
3. Payoffs – outcome of a game due to adopting the
different courses of actions by competing players
in the form of gains or losses for each of the
players.
PRISONER’S
DILEMMA
The Prisoner’s Dilemma is the most well known example of game theory.
Consider the example of two people are caught committing a crime and both to separate cells.
The prisoners are told:
- If they both confess, they’ll each serve 3 years for the robberies and the car theft.
- If only one confesses and the other does not, the one who confesses will be rewarded
with a 1 year sentence while the other will be punished with a 10 year sentence.
Only two possible actions:
1. Confess to the bank robbery
2. Deny having participated in the bank robbery
Since there are two players, each with two different strategies, there are four outcomes that
are possible.
PRISONER’S
DILEMMA
PRISONER’S
DILEMMA
TYPES OF GAME
a. Co-operative and Non-cooperative game
- In co-operative games the players can communicate with each other and collude.
They can also enter into third-party enforceable binding contracts. This types of
game involves forming self-enforcing reliance relationship, which determine an
equilibrium situation
b. Two player and Multiplayer games
- Discrete strategies involve situations where each action can be chosen from a limited
number of alternatives. In the PD game there are only two choices for each player, to
confess or not to confess; thus this is a discrete strategy situation.
c. Zero-sum and Non-zero-sum games
- With zero-sum games the gain of one player(s) is automatically the loss of another
player(s). This can apply for example in derivatives markets, wherein certain
transactions occurs between two speculators.
TYPES OF GAME
d. Perfect and Imperfect Information
- Perfect information refers to the fact that each player has the same information that would
be available at the end of the game. Imperfect information appears when decisions have to
be made simultaneously, and players need to balance all possible outcomes when making a
decision.
e. Statistics and Dynamic games
- Static games involves simultaneous moves; the PD game is a simultaneous game,
meaning that the players make their moves simultaneously, without knowing the move of
the other player.
f. Discrete and Continuous Strategies
- Discrete strategies involve situations where each action can be chosen from a limited
number of alternatives. In the PD game there are only two choices for each player, to
confess or not to confess; thus this is a discrete strategy situation.
TYPES OF GAME
g. ‘One-off’ and Repetitive games
- Most-short run decision scenarios in business, such as pricing
and advertising, are of the repetitive type, in that there is a
continuous interaction between competitors, who can change
their decision variables at regular interval. Long- run decisions,
such as investment decisions, may resemble the ‘one off’
situation; although the situation may be repeated in the future.
STRATEGIC GAME
Two or more participants are faced with choices of actions.
Gains/Losses depend on what others choose to do or not to
do.
Outcome determined jointly by the strategies chosen by all
Insert Related Picture
participants.
Uncertainty is part of the equation.
NASH EQUILIBRIUM
Pure strategy Nash Equilibrium is an action profile with the
property that no single player can obtain a higher pay off by
deviating unilaterally from this profile.
Each player has a strategy and no player can benefit by
changing strategies while the other players keep theirs
unchanged.
Example: Each player is told the strategies of others
- Player’s ask themselves: “Knowing the strategies of
the other players as set in stone, can I benefit by changing my
strategy?”
Managers can use this tools when making
important decisions.
Game Theory is at the forefrant as a strategic
tool.
Gain perspective on how players might act
MANAGER
under various situations.
APPLICATION
Theoretical or practical?
When they do employ this discipline, it’s often
misused to provide a single, overly precise
answer to complex problems.
GROUP 2
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