International Journal of Liberal Arts and Social Science Vol. 8 No.

9 September 2020

A book review on Game Theory: "Art of

Strategy"by Avinash K. Dixit and
Barry J. Nalebuff

Gökhan İçel
Istanbul Commerce University, Phd candidate in International Trade
Dual M.S. degree in Industrial Engineering and Operations Research, Penn State University
M.M.M. degree in Quality and Manufacturing Management, Penn State University
B.S. degree in Textile Engineering, Istanbul Technical University
Turkey

Published: 30 September 2020

Copyright © İçel.

ABSTRACT
Operations Research is the interdisiplinary field of applied mathematics. Its roots come from
second world war. It has wide application in many sciences. Military, economics, business,
manufacturing, technology, medicine, i.e. In this book the author focused on gametheory, a
dicipline under operations research. Game theory has again diffirent application areas in economy
and business. In this book the authors focused on main game theory models, gave practical
examples and Daily samples. They have given examples from economy and business, but kept
examples usually focused on daily problems to keep the complex game theory concepts simple. I
find this game theory book very useful to understand and examine game theory.

Cite this article: İçel, G. (2020). A book review on Game Theory: "Art of Strategy"by Avinash K. Dixit and Barry J.
Nalebuff. International Journal of Liberal Arts and Social Science, 8(9), 49-65.
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International Journal of Liberal Arts and Social Science ISSN: 2307-924X www.ijlass.org

PART 1: Ten strategy stories

Most of us have encountered problems everyday , and at the end of a certain stream of thought or
trial and error, did we find the right solution . The main purpose of this book is to show that
such problems are common, they constitute a whole set of problems and methodical thinking will
help in solving problems . At the beginning of the book, such problems are dealt with in a narrative
narrative in order to introduce game theory concepts that try to think strategically, modeling and
find solutions. Simulating game theory, one of the current and popular approaches of economic
theory, is essentially an approach that provides its popularity, prevalence of use and
accessibility. This book, which allows us to analyze many Nobel Prize-winning economic theory
from a current and daily perspective , therefore started its narration with ten strategy stories first .
1. Number match:
When you are asked to guess this number by keeping a number between one and 100, you are given
5 guesses, and in a game that guides by saying up or down after each guess, dividing the number
range into two equal parts and choosing the number is the ideal strategy. The key lesson of game
theory is to put yourself in the other person's shoes. Remember that the other person's intention is
towin.
2. Win by losing
All three actors were aware that Ruddy was the most popular person among them. If he made it to
the final, Ruddy would most likely be the winner . Richard hoped to meet Kelly in
the finale . Comparing the options, Richard saw that he would achieve the best outcome for himself
by losing. After 4 hours and 11 minutes, Ruddy told me to change his posture, and slipped the
guardian figure, stumbled and lost. Kelly surpassed Richard as a contender in the final
competition. Ruddy used the fateful game for him and became the first champion
of Richard Survivor . What made Richard's game so impressive was that he had foreseen all the
moves.
3. Unfailing hand
Incessant sports announcer who have long-term success , said the player "addressed an infallible"
declare that it has. This is a false perception of reality, according to Professor
of Psychology Thomas Gilovich , Robert Vallone, and Amos Tversky .
They performed this test on the Philedelphia 76 ers basketball team. The results contradicted the
unfailingh and thinking. When a player hit his last shot, his probability of hitting the next was
reduced; If the previous attempt failed, the probability of getting the next one increased.
4. To go ahead or not
In boat races, the leading boat often imitates the strategy of the boat following it. If you're leading,
the best way to stay ahead is to fake the rear like a monkey.
Leading forecasters have an interest in sticking with the herd and making predictions similar to
every one else's predictions . In the personal computer market, Dell is renowned for its ability to
deliver standardized technology to the mass market rather than its innovation capability. The new
ideas mostly came from Apple, Sun, and other startups. P&G, the Dell of
the diaper , followed Kimberly-Klark's innovation of the resealable diaper. Thus , he regained
his dominant position in the market .
There are two ways to keep second place. The moment he reveals his approach to you, you will
immediately imitate it. Or you can wait until the success or failure of this approach is evident.

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5. This is mystance
Catholic church of Math Luther, of the Popes and the assault on the authority of the
council denied the request by not Marthin Luther King refusal to giveup her opinion had. This
determination had long virtuous, profound consequences; It gave
birth to Protestant Reformism and radically changed the medieval stereotype. Charles
De Gaulle watched "No!" his stance influenced many important decisions regarding France's
position in the European Economic Community. His stubbornness did not leave the opponent an
opportunity to offer an acceptabl ecounter-proposal.
A compromise in the short term may be a goodstrategy in thelongrun. The second kind of problem
is managing to reach the required degree of stubbornness.
Ferdin and De Lesseps was a competent engineer with an extraordinary vision and
determination. He became famous by building the Suez Canal. He later attempted the same tactic to
build the Panama Canal, but this time the result was disastrous. De Lesseps' problem was that his
inflexible personality did not allow him to admit defeat even when it was clear that he had lost the
battle.
6. Analyzing with the strategic method
Th etrick is to change the incentives of the future self to change its behavior.
7. Buffet's dilemma:
The issue providing job security is the advantage offered by the collected funds. You put people in
a dilemma of prisoners to get people to do something that is against their interests. This is called
the prisoners' dilemma, as the two sides act against their mutual interests. The police meet with the
two suspects separately. If one suspect thinks the other will confessbe fore him, both inmates are
encouraged to be the first to confess, fearing an increase in his sentence.
8. Mix your games
In a strategic game, it is not possible to predict the opponent's move. Whichever strategy you
choose, there may be an option that will defeat it. Therefore, what is important here is that your
opponent can not predict your choice .
It is difficult to make random selections in a one-move game. As the repetitions of the game
increase, the potency of the approach can increase. Mix your games suggestion does not mean
choosing a game strategy that keeps spinning with predictable logic. A systematic template of your
opponent can easily detect and use against you, as well as constant repetitions of a single
strategy. Important when mixing is unpredictability . The importance of random strategies is one of
the first predictions of game theory. This is a simple and intuitive approach, but needsto be
improvedto be useful in practice.
9. Never give a sucker equal chance
Take a look at the futures market on the Chicago exchange . If another speculatortries to sell you a
futures contract, know that he can only win if you lose. From the point of view of the traders in the
stockexchange, the shopping here is a zero-sumgame. When the two sides agree to trade, they both
think they will make money. But one of them must be wrong. This is the nature of the zero-
sumgame. Neitherside can win. When someone tries to sell you a futures contract, the number that
will entery our pocket will be out of his pocket. Remember that wanting to sell means they see
themselves smarter than you. The buying and selling numbers are not exactly the same; The
difference between them is called the trade difference. The fact that this difference is quite low in
liquid markets indicates that the level of information required in buy and sell orders is limited.

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10. Game theory can be dangerous for your health

One of the important elements of game theory is bargaining. However, bargaining can be
dangerous. This book is the game theory to negotiate in contain shedding light on the
dangers. Understanding the player's point of view and empathy is one of the indispensable priorities
of game theory. Otherwise, defeats and losses are inevitable in the games you play. Let's not forget
that the games we play are small parts of bigger games. Sothere is always a bigger game.

PART 2: Games that can be solved by backward reasoning

The essence of a strategy game is the interdependence of the players' lands. This mutual interaction
occurs in two ways. The first of these is sequencing , players move in turns, that is, in turns. The
second type of interaction is synchronicity, where the players act at the same time, not knowing the
other's current movements. Therefore, each player puts himself in the other's shoes and tries to
calculate what the outcome will be. His best action is an integral part of this general account.
When playing a strategy game, it must be decided whether interactions are sequential or
simultaneous. Some games may contain items from both. In this case, the strategy is adjusted
according to the content of the game.
The general principle in games with sequential moves is that each player calculates the future
counter moves of other players and uses them to make their best move at the moment . This
situation is done by the rule of look forward, reasoning backward.
Most strategy situations consist of a long series of cascading decisions, each involving multiple
alternatives. In these types of games, a tree diagram showing the preferences in the game is a visual
tool to aid in correct reasoning. Each game has two or more players. Using the term decision tree
for situations where there is only one person, the tree that shows the cascade of decisions in a
strategy game is referred to as a game tree.
According to game theory jargon, the result is not necessarily zero-sum, games can result in either
side winning or losing.
Flag and match stick games are sequential games. These games are base games that describe
sequential games. In games with 21 flags or 21 match sticks , two sides consecutively collect the
flag or sticks. They can be arranged so that the one who gets the last flag or collects the last bar will
win or lose. In these games, both sides determine their strategies and play accordingly. The
strategies change according to the total number of flags and the number of bars. It is necessary to
decide in advance how many to collect at a time. These are zero –sum games, meaning the reare
always winners and losers. Also, who will start the game first is of key importance in determining
strategies.
In the dictator game, the bidders pay much smaller amounts compared to the ultimatum game. But
even they pick numbers well above zero. In the game of Ultimatum, the behavior of those making
proposals is both generous and strategic. Most dictators accept this offer so that the other sacrifices
not to find out how greedy they are. Even if the dictator is offered more, he prefer stotake it and not
let the other person know. This one begins to endure crossing the entire street to avoid giving a
beggar a little alms.
When the ultimatum games were played under these conditions, as the degree of inequality of the
proposal increased, the activity of the front insula of the person responding to the
proposal increased. To test this, ultimatum game experiments were conducted in poorer countries,
using amounts equivalent to a few months' salaries of participants. Although a certain reduction in

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rejection responses was observed, nosignificant increase in generosity was observed in the amounts
offered .
The ultimatum by the game and findings resulting from experiments carriedout on the others like
him, stretch with the assumption that every player of the prize will win personally, the only
problem i expect the basis to facing the theory of reasoning can state differs considerably . It is
believed that backward reasoning should remain our starting point for predicting the analysis and
consequences of such games. This takes us beyond classical economic theory. Game theorists
should in corporate their analysis into players' concerns for fairness or altruism. Behavior game
theory does not abandon rationality, but rather expands it. This is the best ; If we better understand
the motives that motivate people, our understanding of strategic interactions as well as economic
decision-making will be enhanced. This is already happening; The boundary research of game
theory is increasingly adding equality, altruism and similar concerns to players' goals.
When we gain some experience in reasoning backwards, you will find that many strategic
situations in our work and daily life have a tree-like logic. However, for complex games like chess,
it is not possible to reach a complete conclusion through backward reasoning. Chess is, in principle,
an ideal game of sequential moves suitable fo rsolving by backward reasoning.
The pragmatic solution involves combining forward-looking analysis with elements of value
judgment. The first is the science of game theory, forward thinking and backward reasoning. The
second is the art of the practitioner, it is to be able to make a value judgment about a position
according to the number of stones and their mutual positioning, even though he can not find a clear
solution that will bring the game to an end from that point forward .
The conclusion we draw from chess gives us a way of thinking about the highly complex games
that we may encounter. You must combine the forward looking rule with the backward reasoning
rule that will guide you in evaluating the intermediate positions you reach at the end of our forward
calculation analysis. Only such a synthesis of game theory science and the art of playing a certain
game can lead to success, not only one of them.
An important practical aspect of looking ahead and reasoning backwards is to play the game from
the perspective of both players. For this, while trying to put yourself in the other person's shoes,
you need to know what they know and what they don't know and target what they really aim
for. Otherwise, you may have to remain indecisive.

CHAPTER 3: The prisoner dilemma and solutions

Al Tucker, one of the pioneers of game theory , worked on the prisoners' dilemma,
the Nash equilibrium , in the 1950s . Prisoners dilemma of matametiksel the structure from
Tuckerman belongs ago . Merill Flood and Melvin Dresher from Rand Cooper's have determined
the mathematical background of this subject. Tucker's genius is that he builds real-life problems on
this math fiction . The solution to the dilemma of prisoners is made throughtables. This is called the
pay off matrix. In many games, such as the imprisonment dilemma, the whole point is to avoid
mutual losing and to achieve a mutually beneficial result.
When this feature is present in games that make moves at the same time, that is, whatever option
the other player or players prefer, the best option for you does not change, the way the player thinks
and the game theorist's analysis is also easy. Therefore, it would be appropriate to highlight this
element and look to facilitate the solution of the game. The name game theorists give to this feature
is the dominant strategy. No matter what strategy or combination of strategies the opposing player

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or players choose, if a player's strategy remains the most favorable of all valid strategies , that
player is considered to have the dominant strategy. This creates a rule for simultaneous moves
games.
The prisoners dilemma is an even more featured game. Not one of the players but both of them
have dominant strategies. This is what makes the prisoner dilemma an important game.
In games of simultaneous moves, the situation is different from sequential games. It will not be
enough to just look back and produce a forward strategy. What is necessary for simultaneous
moves is to think about what the other person is thinking. If you have a dominant strategy,
you should use it. Another important issue here is that firms' efforts to protect themselves do not
work best for them, contrary to what classical economic theories have taught since Adam Smith . In
then extchapter, a broader concept of solutions for simultaneous games will be presented. This
concept is Nash equilibrium.
In the fifty years since the invention of the prisoner's dilemma game, the theory has evolved. Some
developments in this area are taken into consideration. The other side of cooperation is deviation. A
player may be offered an appropriate reward, encouraging them to choose cooperation over the
initial dominant divergence strategy or be discouraged from deviating by the threat of an
appropriate penalty. Punishment is a more common method of solving prisoner dilemmas.
It is a version of the code of conduct for an eye-for-a-tooth behavior. Treat them as others have
treated you. More precisely, the strategy envisages cooperation in the first period , after that it
always imitates the actions of the opponent. Kisasa-tit is the clearest and simplest strategy ever
seen. It's good because it never cheats. He is open to provocation, which means he never allows
him to go unpunished. And it is forgiving because it does not hold grudges for a long time and is
open to repairing cooperation .
Some preconditions and strategies are required to ensure cooperation. First of all, it is necessary to
detect cheating before it can be punished. If this determination happens quickly and accurately, the
penalty will be just in time and accurate. Determining the nature of the punishment is another
strategy. Different penalties can occur with in the structure of the game. Anyone who gains an
advantage through cheating in a game always loses in subsequent games. The limits of acceptable
behavior and the consequences of cheatings hould be clear to the person who intends to
cheat. Precision is another important prerequisite. Players must ensure that deviation will be
punished and cooperation can be rewarded. Another criterion is size. The criminal dimension of the
penalties should be clear. If strong enough to deter criminal who tried to do new tricks, probably
never had to be applied on z . It is therefore necessary to keep the punishment at a sufficiently high
level to provided eterrence.

PART 4: An elegant balance

Business world, sports, politicsetc. Many concepts and techniques from the fields are
covered. There are more examples of the seide as and techniques in later chapters in the book.
A game is a situation of strategic inter dependence. The outcome of our choices, our strategies,
depends on the choices of the person or people acting for a purpose. In this game, the decision-
making party is called the player, and their choices are called the move. In a game, players' interests
can completely conflict with each other. One person's gain is always another's loss. These types of
games are called zero-sum games. However, in more common cases it is the existence of

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partnerships rather than conflicts of interest. To be more precise, the reare mutual gains or mutual
collective losses.
The moves in a game can be sequential or simultaneous. There is a linearchain of thought and
decision in sequential games. I'm evil like that my opponent if I can do it and I said in response
responds as follows. This type of game is studied by drawing a game tree. Here the first rule can be
expressed as " IR referto URLs, walked backward mind" is the rule.
There is a logical reasoning loop in simultaneous games. I think he thinks about me this way,
like. In this cycle, although he does not know the opponent's move in the game, he must make
predictions and make a move. To solve this type of game, we draw a table showing the results
corresponding to all possible combinations of choices.
First of all , whether there is a dominant strategy that negates all strategies of the
opponent , whatever the opponent's choice is, it is checked. This leads us to this second rule : " If
you have a dominant strategy, use it" If we do not have a dominant strategy, this We must make
sure that he will make the move and use the most appropriate move that can correspond.
If the dominant strategy of both sides, then both pressed strategy, namely from all the other
possible strategies of each sideusing our au We look at whether that man is worse. Here, the third
rule should be used if we can detect it . "The interests assessment under Suppressed
strategies" have to do succession do not make a move on. If a dominant strategy emerges in smaller
games in this progression, the second rule comes into play again and the emerging dominant
strategies should be chosen. This approach will lead us to a simpler solvable result.
Finally, there is neither a dominant nor a suppressed strategy, or once the game has been simplified
as much as possible, the fourth rule is applied. "Look for an equilibrium, a binary strategy where
each player's action is better than can be given to the other's action. " The result you will find is a
Nash equilibrium .
John Nash's equilibrium, strategy games, such as thinking of making frames from apartments cycle
so that others thought impossible to kill as manictheoreticalway is değerlendirl . The goal here is to
explore a result in which each player in the game will choose the strategy that best suits his or her
opponent's strategy. If such a combination of strategies comes out, none of the players need to
change their strategy unilaterally. The occurrence of such a result that each player finds the best
response in the game according to the opinion of the opponent's preference and the response they
both give is compatible with the opinion of the opponent, carefully puts the cycle of thinking
(circle) of what the opponent thinks . Therefore, this situation is called the fulcrum or balance of
the thinking systems of the players. This can be used as the definition of Nash Equilibrium. In
addition, if the sum of the results of both players does not change in such games, this situation is
called a fixed sumgame.

PART 5: Choice and chance

The best known and simplest example of the general situation in which random action is required is
the penalty kick in football matches. This situation is called mixed strategies in game theory
terminology. Both players will do their best to hide their intention from the other. For this reason,
we can count this game amongs imultaneous move games. There is no Nash equilibrium in this
game . What we need to do is present the shuffle as a new strategy, then look
for a Nash Equilibrium in this expanded strategy environment . Right and left strategies in this
game are called pure strategy.

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An important general feature of mixed strategy balances in zero-sum games is that the best success
percentage of the player and the best success percentage of the opponent are the same. This
theory is called the Mini maks theorem. This theorem states that in zero -sumgames where players'
interests are diametrically opposed , the player must strive to minimize the opponent's maximum
return while the opponent tries to maximize his minimum return.
The fifth rule can be expressed as follows: if it seems disadvantageous for you to allow your
opponent to anticipate your true preference in the game of forgiveness (zero-sumgame), it is in your
best interest to randomly choose among your available pure strategies. The proportions of your
mix should be a quality that your competitor can not take advantage of by applying a certain pure
strategy among the strategies avail able to you .

SECTION 6: Strategic moves

These types of game-changing actions that ensure the player achieve a more successful outcome are
called strategic moves. The reason for emphasizing this issue is todetermine what needs to be done
and how. It was realized by Thomas Schelling that one or both actors did not make it one of the
main issues of game theory to act toch ange the game .
A commitment is an unconditional move. On the other hand, threats and promises are more
complex conditional moves. In such cases, you need to determine the rule of responding to your
opponent's moves before the game. Threat is a response rule to punish anyone who doesn't act in
the direction you want. The promise is an offer to reward the person who will act the way you
want . The reciprocity rule describes the action you will make in response to the other player's
move.
The general purpose of threats and promises is similar to the purpose of commitments , that is, to
direct others to actions that differ from those they intend to do. In the context of threat and promise,
it would be useful to consider the general purpose in two separate categories. If you want to prevent
people from doing something they are trying to do, this is called deterrence. So the reflection of this
in the mirror can be called compulsive .
There is a general classification of strategic moves in the display above.
All threats and promises have a common feature. The rule of reciprocity takes you to take
precautions that you could not afford without it. If the rule only tells you to do what's best at the
time, it's no different than a no-rulesituation. There will be nochange in others' expectations of your
future actions.
The rule has noeffect, but there are still some notices in games and these notifications are called
warnings and safeguards. If it is in your interest to send a threat, this is called a warning. On the
other hand, if making a promise is in your interest, we can define it as a guarantee in
games. Threats and promises are strategic moves, on the other hand, they take the form of warning
and assurance if they are used to bring the role of information transfer. If we are making a threat or
promise, we must do so clearly. Otherwise, we will not be able to convey to the other party what is
prohibited or encouraged.
The cliffedge strategy that Schelling defines is often described as the first to take his adversary to
the brink of disaster and blink first. You stand on the edge of the cliff and threaten to push the other
person down to force them to fulfill your wishes. Undoubtedly, your adversary will pull you down
with him. So, Schellin , the naive and simple threat of throwing his opponent off a cliff in
coldblood is not reliable.

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SECTION 7: Bring credibility to strategies

The birth of the problem of credible threatening begins with Adam and Eve changing the
punishment that God promised them to give them after they were caught by God. If commitments,
threats, and promisesare not reliable, theywill not help improve our game outcome. However, the
main point we should focus on is the more mechanical aspects of strategic moves, that is, what
should be done to change the game.
The first principle on the road to reliability is to change the payoffs of the game. Two general
tactical groups are used for this. These are writing contracts to support your decision, creating a
reputation for yourself, and using it. A second way is to change the game in a way that limits
your abilities to such a degree that you have no chance to comeback from a commitment . For this,
the possibilities of interrupting communication, burning bridges behind you , allowing the outcome
to take control of you and even leave it to chance can be emphasized. Sometimes building a bridge
instead of burning a bridge can also be a reliable source of commitment.
If we combine these two principles and divide a large commitment into smaller parts, then the gain
for violating one part can make you more than compensate for the loss of other parts of the
contract. For this, the method of moving in small steps is used. When the lath is too high, both sides
may not trust each other. But if the commitment problem is reduced to a sufficiently small scale,
the credibility is sue will resolve itself.
A third way is to enlist the help of others to maintain your commitment. So team work can help us
increase credibility or appoint authorized representatives.
When you profit from making your strategic moves reliable, it will be in your favor to prevent other
players from trying to give credibility to their strategic moves.
Reinhard Selten , Nash could be perfected the concept of balance, thus partially eliminating
pluralism, the possibility of making incorrect moves players can be reduced revealed. This forces
players to optimize their strategy even if the game takes an unexpected turn. This approach is very
similar to the idea of looking forward, backward reasoning, but applies to simultaneous games.
Robert Augman introduced the concept of common knowledge into game theory. To
give an example, the two players have common knowledge on a subject; they both know this and
they both know that each other knows, they both know that the other know this and it goes on
forever. Over the past three decades, ideas and theories of information manipulation have
revolutionized economic science and game theory, and have had a tremendous impact on other
social sciences and evolutionary biology.
Thomas Schelling has made great contributions to the topic of commitment and strategic
moves . The cue and discrimination strategies used to eliminate information a symmetries were
developed by Michael Spence and the seide as were adapted by Joseph Stiglitz to many markets
such as insurance, credit, and labor .

SECTION 8: Interpreting and manipulating information

We do not trust people to tell the truth because it may be against their interests. For this reason,
people look forsigns to learn the honesty of theotherparty in their bilateral dialogues. This issue can
be encountered in pre-marital relationships or relationships in the poker game.
Some players know morethan others about something that has consequences that will affect the
mall. Those who have extra information take care to hide this information. Others are just as

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determined to uncover the truth. Players who know less often tend to take that in for mation straight
from them. Game theorists have studied many tools that serve this purpose.
Actions explain more than words. Players should observe what another player is doing, not what
they say. Each player should end eavorto manipulate their actions in a way that changes the
information content, knowing that the other party will interpret their actions with the same
understanding. These kinds of games of behavior manipulation aimed at manipulating the
inferences of others and seeing others' efforts to manipulate our interests continue every day
through out our lives.
Strategic players with special knowledge try to hide it, fearing that others will be harmed when they
gain access to that information. And, when properly interpreted, they attempt to reveal information
that will work for them. They know that actions, like their faces, leak information. They
preferactions that will increase this leak in their favor. These types of strategies are called signaling
strategies. They will act in a way that eliminates or minimizes leaks against them; This is called a
signal (signal) mixing strategy.
If you want to leak information from someone, you must set up a certain action if the information is
of one kind, or a situation in which it is most appropriate for him to take another action if it is
another type. Action (orinaction) then brings information to light. This strategy is called screening .
Actions aimed at transmitting personal information about a player to other players are called
beacons. In order for a sign to be a reliable carrier of a certain information item, there is a situation
that makes it an optimal action for the player to take it only if and only if it has that special
knowledge.
Whether different players use the discrimination and signaling strategies, the same principle
underlies both, that is, it serves to distinguish between possible types of players and highlight the
special expertise that one of the players has.
Giving no signs is sometimes an act that conveys information. It is often a sign of a bad incident,
but not always. If the other player knows that you have an opportunity for action that points to
something good about yourself, and you do not take that action, he or she will interpret it as you
really do not have the good feature in question.
Everything you do gives a sign, not even sending any sign. For this reason, if you can give a signa
bout yourself, you should. Thus, you will distinguish yourself from those who can not signal. In
some cases, the best way to give a clue about your talentor type is to give no sign, and you can get
the insight that refusing to play the sign game. In some cases, the strongest sign you can send is that
you don't need to give a sign.
This situation in which all types (or everyone with different types of information) exhibit the same
behavior and therefore it is not possible to derive from this behavior, is called the collecting
balance in the signaling game. Different types eventually meet in the same pool of signals. On the
contrary, the type of balance that one type signals, another type does not, so that the action clearly
definesor separates the types is called the separating balance. In order to derive the type
probabilities of actions on the basis of observations, it is necessary to use a formula
called Bayes Rule. Partial information can be extracted from the action to distinguish the two types,
the result is called semi-separation.
The correct balance game mixing ratio of the person depends on the results he obtains. Observing a
player's move provides information about the mix used and provides valuable evidence for

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understanding the results the opponent can achieve. Betting strategies in poker are a prime example
of this.
The most effective application of the concept of discrimination in your life is the one related to
price differentiation. Firms use the concept of distinction when pricing their products and
services. Some firms may use a system that can encourage customers not to deviate from their price
preference. Such a constraint is called incentive compliance limitation. On the other hand, the
requirement of customers to protect their purchase willingness regarding price is called
participation restriction.

Examples given in the relevant book section:

Marriage decision
A lady asks him to tatto otheman's body to see if the person he is planning to marry is serious about
the marriage. When the man does not do it, he thinks that he is not serious and leaves.
King Solomon Dilemma
Two women appeal to the king, claiming ownership of a child. The king tells him that he will
divide the child in two and the part that will remain alive will go to the real mother. The real
mother shows herself and wants her child to be given to the other woman rather than harmed.
Poker game
The poker player must alway shide his hand behind a mask of instability. A good poker player
should avoid regular movements and behave in such a way that they do not follow even the most
basic correct game principles. This example gives an example of raising the pots of the floor at the
poker table using Bayes' Rule.

The simplest probability table of the poker game can be expressed as follows:

Raise See Escape

Good 2/3 1/3 0
Bad 1/3 0 2/3

Before your opponent speaks, you assume that the probabilities of his hand being good or bad are
the same. You can get something out of his speech. If he runs away, you don't need to doubt his
hand is bad. If he sees the ground, you'll know his hand is fine.
The calculation of probabilities due to the elevation of the ground is made by Bayes Rule. The
probability that the opponent player has a good hand, provided that he gets X bid, is equal to that
person's probability of both good hand and probability of cloak X divided by the probability of
always casting X. The player's escape means that his hand is bad. A good hand never runs away. I
seeif he says he must have a good hand, a poker player will neversee if his hand is not good. If a
boost comes in, things get a little more complicated. Since the player has a good hand, the
probability of raising is 1/2 * 2/3 = 1/3. On the other hand, the probability of increasing, iebluffing,
even though he is badly handed is 1/2 * 1/3 = 1/6. Therefore, the probability of raising in total is
1/3 + 1/6 = ½. According to Bayes' rule, the probability of having a good hand depending on the
raising condition is a small part of the total probability of raising compared to when the player's
hand is good. In this case, this ratio is 1/3 / 1/2 = 2/3.

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Used car purchase

The processes of pricing and bargaining were examined by examining the conditions such as
buying and selling used cars, cleaning and insurance. Offering a guarantee is a reliable sign of the
quality of the car. For example, if the estimated repair cost is 500 USD for a quality vehicle and
20000 USD for a poor quality vehicle, the buyer may say to give me a guarantee and give you 800
USD. This is a good offer for the dealer, but only if he knows his car is good quality. Every
figure above 500 USD and below 2000 USD as a guarantee fee will lead good car dealers to act
differently from bad car sellers. The buyer and seller can continue to negotiate in this context.
Fee amount as an MBA graduate
Candidates with an MBA degree are paid higher, and those who do not receiveless. This issue has
been studied in terms of discrimination and signaling. In this game, one of the candidates entered
into a negotiation process with theem ployer and provided a better opportunity and got the job.
Thecost of a specialist managerial skill in an unnecessary environment is 40,000 USD and in a
necessary business environment the cost of an MBA is around 200,000 USD. Assuming people
want to pay off the money spent on an MBA in five years, you would have to pay a candidate with
an MBA at least $ 40,000 per year and $ 90,000 more per year. In this way, two types of certified
candidate status, talented and non-talented, willa rise.
MBA can also come across as a sign tool. This time, the candidate can choose to negotiate with the
recruiter. And it can signal that he can work with a salary from $ 75,000 instead of $ 90,000
for work. This could be a clue regarding his loyalty.
Air ticket prices
Flight tickets are sold to tourist and business travelers. Business travelers tend to pay more for
tickets. Based on this, business class passenger tickets are sold at higher prices.
Let's assume that 30 percent of customers are business travelers and 70 percentare tourists. Let's set
up a scenario to make the calculation on every 100 customers. The table below shows the
maximum price each group is ready to pay for each service class (technically we call it the
reservation price) and the cost of these two different services.

Service type Cost to Reservation price Potential profit of the company

company Tourist Business Tourist Business
Economic One hundred 140 225 40 125
class
First class 150 175 300 25 150

Let's set up the ideal situation for the company. For example, let's assume that they can distinguish
between types with customer at tire. The company can create a perfect price separation. If he sells
the first ticket to tourists for 175 USD , he earns 175-150 = 25 USD. If he sells the economy ticket
for 140 USD , he will make a profit of 140-100 = 40 USD this time. Here, the second option is
more suitable for the company. The best for the company is to sell the first class only
to Business and the economy totourists.
When this strategy is implemented, the company's total profit for 100 customers is as follows.
(140-100) * 70 + (300-150) * 30 =
40 * 70 + 150 * 30 = 2800 + 4500 = 7300 USD

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Although they are ready to pay 225 USD, they can give 140 USD and buy economy seats, which
will earn them a consumer surplus of 85 USD . The company must provide business passengers
with this excess that they will earn if they buy at least economy tickets. For this reason, first class
tickets should be at most 300 - 85 = 215 USD. Therefore, we see that the company can distinguish
between two types of consumers.
Signaling through bureaucracy
People view bureaucratic delays and troubles as indicative of government in competence, although
these are sometimes valuable strategies for dealing with information problems.

CHAPTER 9: Cooperation and coordination

Success is determined by relative performance, not absolute. It is not possible to improve
everyone's situation in zero-sum games. The winning chances depend on the reduction of
inputs. The only way out of this dilemma is through an enforceable collective agreement.
In this section, examples are given where there are more losers than winners. Uncoordinated
choices create greater problems for society with mutual interaction. When we look at the situations
where there are various alternatives, it is obvious how the group fell down on the slippery ground
and regret collectively. Some other examples have an extremely homogeneous structure. With
some examples , a balance situation could be determined based on what the players thought about
other players . In other examples, it was not possible to find a balance. The basic idea of this
section is that the free market will not always lead to the right result. We should not expect that the
coincidences of the past can necessarily be corrected in today's markets. Many situations that are
important in life take place outside of the economic market. General courtesy m Located in a
spectrum ranging from clean air is often not priced, therefore, where there is no invisible hand to
direct the selfish behavior.

SECTION 10: Auctions, bids and competitions

If there are a large number of applicants and a buyer toget the job in a purchasing process, this is
called a purchase tender. To bid at auction or auction requires a certain strategy. The problem arises
when people get excited and price with their emotions. In this case, they may regret later. To get
the job at an auctionor a tender, it is absolutely necessary to define a strategy. Below we will
describe the main auction techniques:

British and Japanese auctions

The most famous British auction type and style . In this type of auction, the price is increased
starting from small. In this format the auctioneer stands in front of the hall and announces the
constantly rising bids in loud voice. The ideal bidding strategy here is very simple; so much so that
it cannot be called a strategy. You continue until the price of the productor service exceeds what
you have in mind , and when it comes to that point, you withdraw. The hardest part is determining
what you mean by " value" . These values are very related products au is the amount you can afford
to give to the service.
Values are two fold: private and common. In the world of special values, the value you give to a
product has nothing to do with the thoughts of others about its worth. In terms of common value,
there is a general value on which all participants meet, although every one may have different
views on this general value. The value that buyers meet in a product or service can have both

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commonand special elements. While common values are valid, when determining the value of a
product or service, it is important to know whoor how many people bid and when they will
withdraw from the tender.
The advantage in Japanese auctions is that when raising prices, it is clear how many people are
active. Even if a participant wants to continue until the end, in the British auction, he can stay
quietly. He can join later with a surprise exit. It is literally known how many people participated in
the Japanese auction, and even what number they were drawn. Japanese auctions can be called a
British auction where every one clearly shows their hand.

Vickrey Auction
At the Vickrey auction, bids are put in a sealed envelope. To determine the winner, envelopes are
opened and the highest bidder wins. However, there is an intervention here . The winner pays not
his own bid, but the second highest bid.
Income balance
At this point you understand that the Vickrey auction yields the same result as the British (or
Japanese) auction method in the same step. The one who reaps the highest value in both wins. In
both, the winning player will pay the second highest bid.

Buyer premium
Auction houses operate with a 20 percent buyer premium. Since the buyer knows this rule, what
weneed to do is assume that the buyer will take this into account when bidding because he knows
this rule. In otherwords, the number that the buyer will set as the upper limit when raising the price
should be twenty percent lower than the number determined for the purchase of the productor
service.

Online auctions
Although the Vickrey auction technique was defined a long time ago, it is not used
today. Nowadays, it emerges as the indispensable technique of online auctions. The world-
famous eBay auction site has an application called bidding by proxy. We can compare this to
the Vickrey auction. Proxy bids are reminiscent of the Vickrey auction. E n the highest bid at the
end of time people earn and pay figure is equal to the second highest bid by proxy.
Sniping (ambush bedtime)
People generally do not prefer to play directly empirically. They wait until the last minute, or even
the last second, to put forward their best offers. This is called sniping (lurking). Bidnapper
that will snip on your behalf, etc. There are internet services such as; they save you the trouble of
waiting in front of your computer until the end of the auction to bid.
One of the powerful ideas of game theory is the concept of being result-oriented. What is meant to
be stated here is to look at the results of the games and to follow the places where the steps you
take result and act accordingly.

Closed envelope tender

The hardest part of sealed-envelope auctions is determining the number of offers to be given. This
requires you to participate in the tender by setting a prices lightly lowerthan the amount you have
set for your bid. How far you willl ower your number is the bid expectations of other

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players. However, their offers also depend on youroffers. At thispoint, it is always planning to end
this endless loop as if you were the winner.

Netherlands Auction
In the Dutch auction, the bidding process works in reverse. The auction starts with a high price,
goes down gradually and stops at one point. This auction is exactly the opposite of the Japanese
auction.

Treasury bond
Each week, the US Treasury opens an auction to determine interest rates on national debt, at least
for that weekly portion. Untiltheearly 1990s, the functioning of the tender was that the winners paid
the number they offered. With the encouragement of Milton Freidman and other economists, the
Treasury switched to uniform pricing in 1992 and made this change permanent in 1998.

Priority game
The priority grabbing game is justlike a duel. If you miss by firing prematurely, it is inevitable that
your opponent will takeover the move and shoot you. If you wait too long, you have a good chance
of being hit without any opportunity to shoot.

War of attrition
The opposite of the war of priority is the war of attrition. The goal here is to overwhelmy our
opponent with your stamina instead of acting first. The essence of the game is not who will move
first, but who will throw the towel first. This is a dangerous game, so making an agreement with the
other player would be the most reasonable strategy.

Chapter 11: Bargaining

The best alternative definition to the agreement reached as a result of the meeting is used as a
bargaining definition in games as “Best alternative to a negotiated agreement (BATNA). This
definition describes the best alternative you can get if you can not agree with the other party. The
bargaining process of unions with managers can be given as an example to this issue. This
approach is used to measure the size of the cake. Often you want to raise
your own BATNA and lower the other party's BATNA . Sometimes these two goals conflict with
each other.
Bargaining can be done in a single issue or in many dimensions. When it is made in one dimension,
there is a total amount and it is shared between the two parties . An example of bargaining in many
dimensions is the bargaining of the unions over health, wages and pension rights.
Rubinstein bargain
If the end date of the game is not known, it is impossible to solve the bargaining problem. It is
only possible to answer this with an in genious approach developed by Ariel Rubinstein . In this
bargaining game, the parties bid alternately. The offers are about how the cake will be divided. The
more patient gains more in this game, and most of the cake goes. Certain situations in the games
foster impatience. The party that controls impatience wins in this bargain game.

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SECTION 12: Voting

As with other multiplayer games, there are strategic elements in the voting process. Voters often
face factors that encourage them to misrepresent their true preferences. This is what the majority of
issues guidelines norany beer can solve the electoral system, because picking a perfect system that
reflects the preferences of individuals in the form of the people's will is not in question. The most
used electoral system is the simple majority rule.
If your vote does not change the situation, you can vote as you please. But if your vote can change
the situation, then you have to act strategically. An ideal electoral system is one that unites people
in a way that expresses their individual preferences and will, without directing them to act
strategically. The conclusion reached by counting and collecting the votes in any way is definitely
flawed. In practical terms, this means that there will always be factors that guide people to act
strategically. Thus, the election results will be determined by this process as much as the choices of
the voters.
In the US legal system, it is first decided whether the suspect is guilty or innocent. The punishment
to be imposed is determined only after the suspect is found guilty. It can be considered that this is a
relatively minor point regarding the method of judgment. However, the order of priority among
these decisions may mean the difference between life and death, or even between conviction and
acquittal.
It would be appropriate for candidates to determine their position in an election environment in
advance. Does the voter have a definite decision or is it ambiguously the voter in the
middle? Therefore, it is also strategic for candidates to decide on their positions. The advantage of
the middle position rule is that there are no factors that encourage any voters to overturn their
choice. Giving the right vote is the dominant strategy for every one. Theonly problem with
adopting the middle voter position is the limitations in implementation. This option is only possible
if everything can be reduced to a one-dimensional preference, as in the liberal-conservative
opposition. However, it is not easy to classify all issues in thisway.
The US Constitution is also mentioned in the voting section. The reason for this is that the authors
wanted to show the durability of this Constitution within the scope of game theory.

SECTION 13: Incentives

Why don't socialist economies work right? The reason for the collapse of the five-year development
plan, elaborated by Stalin and his successors, was that workers and managers lacked sufficient
incentives. Most importantly, it puts the good worker on the same level with the enoug hones to
manage. There was nothing that encouraged people to take initiative or to innovate, but there were
every reason for them to get too easy, for example it was enough to just fill the quota without
improving quality.
There are incentives for an academic writer while doing the essay reading of the book. However, if
the author asks students to help with this, they have no encouragement. In order to increase
accuracy, the author must set an incentive for students. This incentive is a financial aid for
accuracy.
Many incentive schemes give incentives linearly. For example, it is a linear incentive for a
company to give stock to its employees. Other common payment programs are not distinctly
linear. The most typical example of this is incentives based on whether the result exceeds a
predetermined threshold or allocated quota.

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There are two main aspects to an incentive scheme: the average pay to the worker enough to
overcome the participation constraint , and the pay depending on whether the outcome is good or
bad to encourage him to do more . The wider the difference between these two, the greater the
potency of the incentive.
We pay productivity wages because we have to pay the worker enough to convince him to work at
our company and adjust this amount in a way that encourages careful effort. This way we get a
control over the productivity of the worker.
Employees often have morethan one task. In such cases, incentives for different tasks may interact
with each other. Ultimately, the overall effect depends on whether these two tasks are substitutes or
complementary to each other. In a situation where tasks are interchangeable, incentive incentives to
an effort in one direction will have a negative effect on the end result in another.
In many companies and organizations, there are many people doing similar or even exactly the
same tasks at the same time. This situation will reveal competition among workers. This situation
can be overcome by paying according to relative performance with the appropriate incentive
system.
Most organizations of any size consist of many layers. Companies have a hierarchical structure
such as shareholders, board members , senior management, middle management, chief and line
worker. Each of these levels is in charge of the lower ones in the hierarchy and is obliged to
provide them with appropriate incentives.
In some organizations, the control structure is not pyramid. In work places where the pyramid is
reversed, a worker is responsible to morethan one boss. We encounter this situation mainly in the
public sector.

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