Game Theory

Outline
• What is Game Theory?
• History of Game Theory
• Applications of Game Theory
• Key Elements of a game
• Types of games
• Nash Equilibrium (NE)
• Pure Strategies & Mixed Strategies
• 2players Zero-Sum games
 What is Game Theory?
• In strategic games, agents choose strategies
that will maximize their return, given the
strategies the other agents choose.

• The mathematics of human interactions

 History of Game Theory
• von Neumann wrote a key paper in 1928
• 1944: “Theory of Games and Economic
Behavior” by von Neumann and Morgenstern
• 1950: Nash invents concept of Nash
equilibrium
• Game theory booms after this…
• 1994: Harsanyi, Nash, and Selten win Nobel
Prize in economics for game theory work
 Applications of Game Theory
• Mathematics • Psychology
• Computer Science • Law
• Biology • Military Strategy
• Economics • Management
• Political Science • Sports
• International Relations • Game Playing
• Philosophy
 Key Elements of a game

• Players: Who is interacting?

• Strategies: What are their options?
• Payoffs: What are their incentives?
• Information: What do they know?
• Rationality: How do they think?
 Types of games
• Cooperative or non-cooperative
• Zero sum and non-zero sum
• Simultaneous and sequential
• Perfect information and imperfect
information
• Finite & Infinite Strategies
 Pure Strategies
• The upper value of the game is equal to the
minimum of the maximum values in the
columns.

• The lower value of the game is equal to the

maximum of the minimum values in the rows.
 An Example:
A
Minimum
Y1 Y2 (MAXMIN)
B
X1 10 6 6

X2 -12 7 -12

Maximum 6
(MINIMAX)
10 7 7
 Mixed Strategies
• A mixed strategy game exists when there is no
saddle point. Each player will then optimize
their expected gain by determining the
percent of time to use each strategy.
 Nash Equilibrium (NE)
A player’s best strategy is that strategy that
maximizes that player’s payoff (utility),
knowing the strategy's of the other players.
 What Is a Zero Sum Game?
• Competitive game
• Players either win or lose
 2-players Zero-Sum games
Penny Matching:
• Each of the two players has a penny.
• Two players must simultaneously choose whether to show the Head or
the Tail.
• Both players know the following rules:
-If two pennies match (both heads or both
tails) then player 2 wins player 1’s penny.
-Otherwise, player 1 wins player 2’s penny.

Player 2
Head Tail
Head -1 , 1 1 , -1
Player 1
Tail 1 , -1 -1 , 1
 Assumptions of the Game
• Games are non-cooperative
• There is no communication between players
• Rational play is used by each player to determine the
strategy he should play
– Each player does what is in his own best interest
– I.E. Player does whatever possible to earn the highest
payoff (within the rules of the game)
 Key Concepts of Game Theory
• Payoff
• Saddle point
 Prisoner’s Dilemma
• No communication:
- Strategies must be undertaken without
the full knowledge of what the other
players (prisoners) will do.

• Players (prisoners) develop dominant

strategies but are not necessarily the best
one.
Payoff Matrix for Prisoner’s Dilemma
Ted

Confess Not Confess

1 year for Bill
Confess Both get 5 10 years for
years Ted
Bill
10 years for Bill
1 year for Ted Both get 3
Not Confess
years
 Nash’s Equilibrium
• This equilibrium occurs when each player’s
strategy is optimal, knowing the strategy's of the
other players.

• A player’s best strategy is that strategy that

maximizes that player’s payoff (utility), knowing
the strategy's of the other players.

• So when each player within a game follows their

best strategy, a Nash equilibrium will occur.
 Example of Zero Sum Game
• Two players play a game where a coin is
flipped (call the players rose & Colin)
• Each player chooses heads or tails
independent of the other player
• The payoff’s (rewards) can be displayed in a
reward matrix
Example of Zero Sum Game
Reward Matrix

Colin

Strategy H T

Rose H 3 -6

T 2 1
 Assumptions of the Game
• Games are non-cooperative
• There is no communication between players
• Rational play is used by each player to determine the
strategy he should play
– Each player does what is in his own best interest
– I.E. Player does whatever possible to earn the highest
payoff (within the rules of the game)
 Player’s Payoffs

• The reward (or deficit) a player earns from a given play in a game
• Row player’s payoffs are shown in matrix
• Column player’s payoffs are the negatives of the row player’s payoffs
 Player’s Payoffs
Rose’s Payoffs

Colin

Strategy H T

Rose H 3 -6

T 2 1
 Player’s Payoffs
Colin’s Payoffs

Rose

Strategy H T

Colin H -3 -2

T 6 -1
 Saddlepoint
• Pair of strategies (one for each player) which
the game will evolve to when each player uses
rational play
• This is the optimal strategy for both players
• Two ways to find saddle point
– Minimax & Maximin principles
– Movement diagram
 Minimax/Maximin (Method)
• Maximin: row player's strategy
– Find minimum row entry in each row
– Take the maximum of these
• Minimax: column player's strategy
– Find the maximum column entry in each column
– Take the minimum of these
Minimax/Maximin (Applied)
Colin’s Optimal Strategy

Colin

Strategy H T

Rose H 3 -6

T 2 1

Rose’s Optimal Strategy

 Movement Diagram (Method)
• Simpler way to find the saddle point
• 1st - consider Rose’s point of view
Movement Diagram (Applied)

Colin

Strategy H T

Rose H 3 -6

T 2 1
 Colin
H T
Saddle Point Rose H 3 -6

Comments T 2 1

• Saddlepoint = 0 fair game

• Saddlepoint  0  biased game
– Game biased toward Rose

• This game has a saddlepoint

– It is a “determinate” game
 Determinate Games
• Rose/Colin game is “determinate”
– There is a saddle point
• The saddle point indicates
– There is a clear set of strategies which the players
ought to use to attain the highest payoff in the
long run
• When there is no saddle point
– The game is called “indeterminate”
 Game Tree
Diagram showing the progression of
moves in the game

Information Set
When a player makes a choice, he/she
knows he/she is at a node in a particular
information set, but he/she does not know
which node
Decision Node
•A moment in the game at which a player must act
 Indeterminate Games
• No saddle point
• Rationalization of the other player’s moves
used
– Players look out for own best interest
– Each player can take advantage of the other
 Indeterminate
The Holmes Moriarty Paradox (revisited)
Games

Moriarty’s Options

Canterbury Dover
(C) (D)

Holmes's Canterbury
0 2/3
Options (C)

Dover
1 0
(D)
 Game Tree
Holmes and Moriarty in London
Information Set
for Holmes

Moriarty detrains Moriarty detrains

at Canterbury at Dover

Holmes Holmes Holmes Holmes

detrains at detrains at detrains at detrains at
Canterbury Dover Canterbury Dover

Holmes Holmes Fighting Holmes

dies escapes chance dies
No Saddle Point
Moriarty’s Options

Canterbury Dover
(C) (D)

Holmes's Canterbury
0 2/3
Options (C)

Dover
1 0
(D)

•0 = Holmes dies
•2/3 = Holmes has a fighting chance
•1 = Holmes succeeds to escape
 Finding Mixed Strategy
Moriarty’s Options
Canterbury Dover
(C) (D)
Holmes's Canterbury
0 2/3
Options (C)
p1
Dover
1 0
(D)
p2

q1 q2
Mathematical Expectation employed
E = p1q1 + p2q2 + … + piqi
 Mixed Strategy
Moriarty’s Options
Holme’s (C) (D)
Expectation Holmes’
(C) 0 2/3
Options
(D) 1 0
EHolmes : 0C+1D = 2/3C+0D
D=2/3C or 1-C=2/3C
C=3/5 => D=2/5
StrategyHolmes = 3/5C+2/5D
 Mixed Strategy
Moriarty’s Options
Moriarty’s (C) (D)
Expectation Holmes’
(C) 0 2/3
Options
(D) 1 0
EMoriarty : 0C+2/3D = 1C+0D
2/3D = C or 2/3(1-C) = C
2/3 = 5/3C
C = 2/5 => D = 3/5
StrategyMoriarty= 2/5C+3/5D
 Mixed Strategy
Moriarty’s Options
(C) (D) 2/5C+3/5D

(C) 0 2/3
Holmes's
Options
(D) 1 0

3/5C+2/5D
 Conclusion
• Many uses of game theory
– Zero sum games / non zero sum games
– Cooperative / non-cooperative
• Applications of game theory
 Conclusion
• Why is game Theory a successful model?
– Wide variety of applications
– Concrete map of
• Rules of the game
• How the game is played
• Knowledge of player’s at any given moment
– Ability to analyze complex problems