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Draft On Game Theory

Game theory is the formal study of strategic decision making where an individual's success depends on the actions of others. It was first studied formally in 1838 and gained prominence after John von Neumann and Oskar Morgenstern published their seminal book on the topic in 1944. Game theory has since been applied to economics, politics, biology, and other fields to analyze situations involving cooperation and conflict between interdependent decision makers.

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Pranay Somani
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45 views4 pages

Draft On Game Theory

Game theory is the formal study of strategic decision making where an individual's success depends on the actions of others. It was first studied formally in 1838 and gained prominence after John von Neumann and Oskar Morgenstern published their seminal book on the topic in 1944. Game theory has since been applied to economics, politics, biology, and other fields to analyze situations involving cooperation and conflict between interdependent decision makers.

Uploaded by

Pranay Somani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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What is Game Theory?

Game theory is the formal study of conflict and cooperation. Game theoretic
concepts apply whenever the actions of several agents are interdependent. These
agents may be individuals, groups, firms, or any combination of these. The
concepts of game theory provide a language to formulate, structure, analyze,
and understand strategic scenarios.

History of Game Theory


The earliest example of a formal game-theoretic analysis is the study of a
duopoly by Antoine Cournot in 1838. The mathematician Emile Borel
suggested a formal theory of games in 1921, which was furthered by the
mathematician John von Neumann in 1928 in a “theory of parlor games.” Game
theory was established as a field in its own right after the 1944 publication of
the monumental volume Theory of Games and Economic Behaviour by Von
Neumann and the economist Oskar Morgenstern. This book provided much of
the basic terminology and problem setup that is still in use today. In 1950, John
Nash demonstrated that finite games have always have an equilibrium point, at
which all players choose actions which are best for them given their opponents’
choices. This central concept of noncooperative game theory has been a focal
point of analysis since then. In the 1950s and 1960s, game theory was
broadened theoretically and applied to problems of war and politics. Since the
1970s, it has driven a revolution in economic theory. Additionally, it has found
applications in sociology and psychology, and established links with evolution
and biology. Game theory received special attention in 1994 with the awarding
of the Nobel prize in economics to Nash, John Harsanyi, and Reinhard Selten.
At the end of the 1990s, a high-profile application of game theory has been the
design of auctions. Prominent game theorists have been involved in the design
of auctions for allocating rights to the use of bands of the electromagnetic
spectrum to the mobile telecommunications industry. Most of these auctions
were designed with the goal of allocating these resources more efficiently than
traditional governmental practices, and additionally raised billions of dollars in
the United States and Europe.
More about the Game Theory
As a mathematical tool for the decision-maker the strength of game theory is the
methodology it provides for structuring and analysing problems of strategic
choice. The process of formally modelling a situation as a game requires the
decision-maker to enumerate explicitly the players and their strategic options,
and to consider their preferences and reactions. The discipline involved in
constructing such a model already has the potential of providing the decision-
maker with a clearer and broader view of the situation. This is a “prescriptive”
application of game theory, with the goal of improved strategic decision
making.

What are games?


The object of study in game theory is the game, which is a formal model of an
interactive situation. It typically involves several players; a game with only one
player is usually called a decision problem. The formal definition lays out the
players, their preferences, their information, the strategic actions available to
them, and how these influence the outcome.

01:18
01:18
Situations of Games
Game Theory is concerned with how individuals make decisions when they are
aware that their actions affect each other and when each individual takes this
into account. The types of situations I will be discussing in this project will be
those of Dominant Strategy Equilibrium, Nash Equilibrium, Nash Equilibrium
in Dominant Strategies and the Mixed Strategy Equilibrium.
DOMINANT STRATEGY
EQUILIBRIUM

Since all players are assumed to be rational, they make choices which result in
the outcome they prefer most, given what their opponents do. In the extreme
case, a player may have two strategies A and B so that, given any combination
of strategies of the other players, the outcome resulting from A is better than the
outcome resulting from B. Then strategy A is said to dominate strategy B. A
rational player will never choose to play a dominated strategy. In some games,
examination of which strategies are dominated results in the conclusion that
rational players could only ever choose one of their strategies. The following
examples illustrate this idea.

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