Game theory

History of game theory

The individual closely associated with the creation of the theory of games is John von
Neumann, one of the greatest mathematicians of this century. Although others proceeded him
in formulating a theory of games - notably Emile Borel - it was von Neumann who published
in 1928 the paper that laid the foundation for the theory of two-person zero-sum games.

The theory of Games was born in 1944 with the publication of Theory of Games and
Economic Behaviour by Hungarian-born American mathematician John von Neumann and
his Princeton University colleague Oskar Morgenstern, a German-born American economist.
In their book, . They observed that economics is much like a game, wherein players anticipate
each other’s moves, and therefore requires a new kind of mathematics, which they called
game theory. Their choice of title was a little unfortunate, since it quickly got shortened to
“Game Theory,”
Nobel Laureate and a Father of Game Theory, Lloyd S. Shapley(92), who shared
the 2012 Nobel Memorial Prize in Economic Science for work on game theory that has been
used to study subjects as diverse as matching couples and allocating costs.

Classification of game theory

It broadly classified into three main sub-categories of study

(1) Classical game theory

It focuses on optimal play in situations where one or more people must make a
decision and the impact of that decision and the decisions of those involved is known.
Decisions may be made by use of a randomizing device like piping a coin .

It focuses on questions like, What is my best decision in a given economic

scenario, where a reward function provides a way for me to understand how my
decision will impact my result.
Examples:

Poker, Strategic military decision making, Negotiations.

(2) Combinatorial game theory

It focuses on optimal play in two-player games in which each player takes turns
changing in pre-defined ways. In other word, combinatorial game theory does not consider
games with chance (no randomness).
Generally two player strategic games played on boards. Moves change the
structure of a game board.
Examples:

Chess, Checkers, Go.

(3) Dynamic game theory:

It focuses on the analysis of games in which players must make decisions over time
and in which those decisions will affect the outcome at the next moment in time. It often
relies on differential equations to model the behavior of players over
Time.

It can help optimize the behavior of unmanned vehicles or it can help you

Capture your baby sister who has escaped from her playpen.

In general games with time, Games with motion or a dynamic component.

Examples:

Optimal play in a dog fight, chasing your brother across a room.

Key elements in game theory

Player: who is interacting?

Strategies: what are the options of each player? In what order do players act?

Payoffs: How do strategies translate into outcomes? What are players’ preferences over
possible outcomes?
Information/Beliefs: What do players know/believe about the situation and about one
another? What actions do they observe before making decisions?
Rationality: How do players think?
Mathematical concept in Game Theory

The following the prerequisite required for game theory

Sum of gains and loss

If in a game sum of the gains to one player is exactly equal to the sum of losses to
another player, so that sum of the gains and losses equal zero, the corresponding game is
said to be zero sum game.

Types of games

Games can be classified according to certain significant features, the most obvious of
which is the number of players. Thus, a game can be designated as being a one-person, two-
person, or n-person (with n greater than two) game, games in each category having their own
distinctive features.

One-person games

One-person games are also known as games against nature. With no opponents, the
player only needs to list available options and then choose the optimal outcome. When
chance is involved the game might seem to be more complicated, but in principle the decision
is still relatively simple.

For example, a person deciding whether to carry an umbrella. While this person may
make the wrong decision, there does not exist a conscious opponent. That is, nature is
presumed to be completely indifferent to the player’s decision, and the person can base his
decision on simple probabilities. One-person games hold little interest for game theorists.

Two person zero sum game (with two players)

The game in which there are exactly two player and the interest of the players
completely opposed are referred as two-person zero sum games. They are called zero- sum
games because one player wins whatever the other player loses. In short it is denoted by
TPZS game.
For example, All parlour game and sports, like Tic-tac-toe, chess, cribbage,
backgammon, and tennis ect., are TPZS games
Two person zero sum game (with more than two players)

TPZS games with more than two people involved are

(i) Team sports with only two sides, but with more than one player in each side

(ii) Many people involved in surrogates for military conflict, so it should come as no
surprise that many military problems can also be analyzed as TPZS games.

Games which are not TPZS

(i) Those parlour games in which the players cannot be clearly separated into two sides
are not TPZS games
(ii) Those poker and Monopoly games when played by more than two people are not
TPZS games.
(iii) Most real economic “games” are not TPZS, because there are too many players, and also
the interests of the players are not completely opposed.

Positive-sum game

In game theory, a term positive sum refers to situations in which the total of gains
and losses is greater than zero.

A positive sum occurs when resources are somehow increased and an approach is
formulated such that the desires and needs of all concerned are satisfied.

Perfect games

Games of perfect information in which each player knows everything about the game
at all times. It is called perfect games

For example, chess in which each player knows everything about the game at all
times. In chess exactly one of three outcomes must occur if the players make optimal choices:
(i) White wins (has a strategy that wins against any strategy of black),
(ii) Black wins (iii) White and black draw.

Imperfect games

Games of imperfect information in which each player do not knows everything about
 the game at all times. It is also called imperfect game

For example, Poker in which players do not know all of their opponents’ cards.

Finite games

Games in which each player has a finite number of options, the number ofplayers is
finite, and the game cannot go on indefinitely.

For example, chess, checkers, poker, and most parlour games are finite.

Cooperative games

In game theory, a cooperative game (or coalitional game) is a game with competition
between groups of players ("coalitions") due to the possibility of external enforcement of
cooperative behaviour (e.g. through contract law).

Non cooperative games

Those are opposed to cooperative games in which there is either no possibility to

forge alliances or all agreements need to be self-enforcing (e.g. through credible threats).

Pay off

The outcome of the game resulting from a particular decision (or strategy) is called
pay off . It is assumed that pay off is also known to the player in advance.
It is expressed in times of numerical values such as money, percent of market share
or utility.

Pay off matrix

The pay offs in terms of gains or losses, when players select their particular
strategies, can be represented in the form of matrix is called pay off matrix.
Let A1, A2,....Am are possible strategies for player
A Let B1,B2, Bn are possible strategies for player B.
The total number of possible outcomes are m x n and it is assumed that each
player knows not only his own list of possible course of action but also his opponent.
 For our convenience, we assume that player A always a gainer whereas player B a
looser

Pay off matrix

The pay offs in terms of gains or losses, when players select their particular
strategies, can be represented in the form of matrix is called pay off matrix.
Let A1, A2,....Am are possible strategies for player
A Let B1,B2, Bn are possible strategies for player B.
The total number of possible outcomes are m x n and it is assumed that each
player knows not only his own list of possible course of action but also his opponent.
For our convenience, we assume that player A always a gainer whereas player B a
looser.
 Let aij=pay off which player A gain from player B, if player A choose strategy i and
player B chooses strategy J.
Pay of matrix player A is represented in the form of table

Player B's strategies

Player A's strategies
B1 B2 ... Bn
.
A1 a11 a12 ... a1n
.
A2 a21 a22 ... a2n
.
.... ...
.
A am1 am2 ... amn
m .

Remarks
For the zero sum games, the gain of one player is equal to the loss of other and vice
versa. i.e one player pay off table would contain the same amounts in pay off table of other
player with the sign changed. Therefore it is enough to construct pay of table for one
player.

Strategy

The strategy for a player is the list of all possible actions (moves or course of action)
that he will take for every pay-off (outcome) that might arise. It is assumed that all course of
possible actions are known in advance to the player.

Types of Strategy

Usually player in game theory uses two types of strategy namely pure strategy and
mixed strategy .

(i) Pure strategy:

Particular course of action that are selected by player is called pure strategy (course of
action). i.e each player knows in advance of all strategies out of which he always selects only
one particular strategy regardless of the other players strategy, and objective of the player is
to maximize gain or minimize loss
(ii) Mixed strategy:

Course of action that are to be selected on a particular occasion with some fixed
probability are called mixed strategies. i.e there is a probabilistic situation and objective of the
players is to maximize expected gain or minimize expected losses by making choice among
pure strategy with fixed probabilities.
In mixed strategy, If there are 'n' number of pure strategies of the player, there exist a
set S={p1,p2, pn} where pj is the probility with which the pure strategy, j would
be selected and whose sum is unity.

i.e p1+p2+.....+pn=1 and pj>=0 for all j=1,2, n.

Remark:

(i) If a player randomly chooses a pure strategy, we say that the player is using a
"mixed strategy." In a pure strategy a player chooses an action for sure, whereas in a mixed
strategy, he chooses a probability distribution over the set of actions available to him.
(ii) If a particular pj=1 and all others are zero, then the player is said to select pure
strategy J.

Optimal strategy

The particular strategy (or complete plan) by which a player optimizes his gains or
losses without knowing the competitor's strategies is called optimal strategy.

Value of the game

The expected outcome when players follow their optimal strategy is called the value
of the game, It is denoted by V

Basic assumptions of game

(i) Each player has available to him a finite number of possible strategies. The list may not
be same for each player.

(ii) Player A attempts to maximize gains and player B minimize losses.

(iii) The decisions of both players are made individually prior to the play with no
communication between them.
(iv) The decisions are made simultaneously and also announced simultaneously so that
neither player has an advantage resulting from direct knowledge of the other player 's
decision.
(v) Both the players know not only possible pay offs to themselves but also other.

Minmax-Maxmin principle

The selection of an optimal strategy by each player without the knowledge of the
competitor's strategy is the basic problem of playing games. The objective of the study is to
know how these players select their respective strategy so that they may optimize their pay
off. Such a decision making criterion is referred to as the minmax -maxmin principle

Remarks

Minmax-Maxmin principle given the best possible selection of strategy for both
players in pure strategy problem.

Saddle point

If the minmax value = maxmin value, then the game is said to have a saddle
(equilibrium) point
Remarks

(i) The corresponding strategy at saddle point are called optimum strategy.

(ii) The amount of pay off at an saddle point is known as the value of the game.

(iii) A game may have more than one saddle point.

(iv) There are game without saddle point.

(v) Its name derives from its being the minimum of a row that is also the maximum of a
column in a payoff matrix—to be illustrated shortly—which corresponds to the shape
of a saddle.
Procedure to determine saddle point
Step:-01
Select the minimum (lowest ) element in each row of the pay off matrix and write
them under 'row minima' heading. Then select the largest element among these elements and
enclose it in a rectangle.
Step:-02

Select the maximum (largest) element in each column of the pay of matrix and write
them under 'column maxima' heading. Then select the lowest element among these elements
and enclose it in a circle.
Step:-03

Find out the elements which is same in the circle as well as rectangle and mark the
position of such elements in the matrix. This element represents the value of the game and is
called the saddle point.

Games without saddle point

Suppose if there is no pure strategy solution for a game, then there is no saddle point
exist. In these situations, to solve the game both the player must determine the optimal
mixtures of strategies to find saddle point.
The optimum strategy mixture of each player may be determined by assigning each
strategy it probility of being chosen. The optimal strategy so determined is called mixed
strategy.

Fair Game

If the value of the game is zero (i.e. there is no loss or gain for any player), the game
is called fair game. The simplest type of game is one where the best strategies for both
players are pure strategies. This is the case if and only if, the pay-off matrix contains a saddle
point.

Strictly determinable

A game is said to be strictly determinable if the maxmin and minmax values of the
game are equal and both equal the value of the game.
Example:-01 (Games with saddle point)
Find the optimal plan for both the player

Player-B
I II III I
V
Player-A I
-2 0 0 5
II 4 2 1 3
II
I -4 -3 0 -2
5 3 -4 2
I
V

Solution:-
We use maxmin-minmax principle for solving the game.

Player-B Row
I II II I Minimu
I V m
Player-A
I -2 0 0 5 -2
1
II 4 2 3
1 1
II -2
I -4 -3 0 -4
-6
5 3 -4 2
I
V
Column 5 3 5
Maximu 1
m

Select minimum from the column maximum values. ie.

Minimax = 1, (marked as circle )
Select maximum from the row minimum values ie.
Maximin = 1, ( marked as rectangle)
Player A will choose strategy II, which yields the maximum payoff of 1
Player B will choose strategy III.
The value of game is 1, which indicates that player A will gain 1 unit and player B
will sacrifice 1 unit.
Since the maximin value = the minimax value =1, therefore the game has saddle
point and the game is not fair game. (since value of the game is non zero)
Also maxmin=minimax=value of game, therefore the game is strictly determinable.
It is a pure strategy game and the saddle point is (A-II, B-III)
The optimal strategies for both players given by pure strategy , Player A must select
strategy II and playerB must select strategy III.
Example:-02
For the game with payoff matrix
Player B

Player A -1 2 -2
6 4 -6
Determine the best strategies for players A and B and also the value of the game. Is this
game (i) fair (ii) strictly determinable?
Solution:-

Select minimum from the column maximum values. ie.

Minimax = 1, (marked as circle )
Select maximum from the row minimum values. ie.
Maximin = 1, ( marked as rectangle)
Player A will choose strategy I, which yields the maximum payoff of -2
Player B will choose strategy III.
The value of game is -2, which indicates that player A will gain -2 unit and player B
will sacrifice -2 unit.
Since the maximin value = the minimax value =-2, therefore the game has saddle
point and the game is not fair game. (since value of the game is non zero)
Also maxmin=minimax=value of game, therefore the game is strictly determinable.
It is a pure strategy game and the saddle point is (A-I, B-III)
The optimal strategies for both players given by pure strategy , Player A must select
strategy II and playerB must select strategy III.
Example:-03
Find the range of values of p and q which will render the entry (2,2) a saddle
point for the game.
Player B

Player A B1 B B3
2
A1 2 4 5
A2 10 7 Q
A3 4 p 6
Solution:-
Let us ignore the values of p and q in pay off matrix and proceed to
calculate maxmin and minmax values.

Example:-04
For what value of a, the game with following pay-offs matrix is strictly determinable?
Player B

Player A B1 B2 B3
A1 a 6 2
A2 -1 a -7
A3 -2 4 A
Solution:-
Let us ignore the values of a in pay off matrix and proceed to calculate
maxmin and minmax values.
Player B

Player A B1 B2 B3 Row minimum

A1 a 6 2 2
A2 -1 a -7 -7
A3 -2 4 a -2
Column Maximum -1 6 2
Here maxmin=2, minmax=-1, i.e the value of the game lies between -1 and 2.
i.e maxmin is not equal to minmax, therefore there is no unique saddle point.
Games with no saddle point should be solved using mixed strategy.
For strictly determinable game , we must have -1<=a<=2.

Procedure to solve 2x2 game without saddle point

Here
p1=probability of player A choose strategy A1
p2=probability of player A choose strategy A2
q1=probability of player A choose strategy B1
q2=probability of player A choose strategy B2
Example:-01

Two player A and B match coins. If the coins match, then A wins two units of
value, if the coin do not match, then B win 2 units of value. Determine the optimum
strategies for the players and the value of the game
Solution:-

Let us construct the pay off matrix for player A

Player B

Since maxmin=-2 and minmax=2. i.e the value of the game lies between -2 and 2.
i.e maxmin is not equal to minmax, therefore there is no unique saddle point.
Games with no saddle point should be solved using mixed strategy.
It is a 2x2 game without saddle point, we use the following formulae.
Example:-02
Consider a modified form of “matching biased coins" game problem. The matching
player is paid Rs. 8.00 if the two coins turn both heads and Rs. 1.00 if the coins turn both
tails. The non-matching player is paid Rs. 3.00 when the two coins do not match. Given
the choice of being the matching or non-matching player, which one would you choose
and what would be your strategy?
Solution:-
Let us construct the pay off matrix for matching player

Non matching player

Since maxmin=-3 and minmax=1. i.e the value of the game lies between -3 and 1.
i.e maxmin is not equal to minmax, therefore there is no unique saddle point.
Games with no saddle point should be solved using mixed strategy.
It is a 2x2 game without saddle point, we use the following formulae
The assignment method in operation research is a strategy for allocating organizational resources
to tasks to increase profit via efficiency gains, cost reductions, and improved handling of
operations that might create bottlenecks. It is an operations management tool that, by
allocating jobs to the appropriate individual, minimizes expenses, time, and effort.

The technique is an essential tool for project management and cost accounting. It assists in
allocating indirect expenses, such as overhead, to objects or cost centers according to
predetermined standards, such as direct labor hours or required machine hours. The method
helps determine the overall cost of every good or service, which helps with pricing, output, and
resource distribution decisions. It also guarantees effective work allocation, on-time project
completion, and economical use of resources. In short, it solves assignment problems.

Assignment problems involve assigning workers to specific roles, such as office workers or
trucks on delivery routes, or determining which machines or products should be used in a plant
during a specific period. Transportation problems involve distributing empty freight cars or
assigning orders to factories. Allocation problems also involve determining which machines or
products should be used to produce a given product or set of products. Unit costs or returns can
be independent or interdependent, and if allocations affect subsequent periods, the problem is
dynamic, requiring consideration of time in its solution.

The assignment problem can be solved using four methods: The complete enumeration method,
the simplex method, the transportation method, and the Hungarian method.

The complete enumeration approach generates a list of potential assignments between resources
and activities, from which the best option is chosen based on factors like cost, distance, time, or
optimum profit. If the minimum cost, time, or distance for two or more assignments is the same,
then this approach offers numerous optimal solutions. However If there are a lot of assignments,
it is no longer appropriate for manual calculations. Assignment method calculators, if reliable,
can be used for the same.

The simplex method can be solved as a linear programming problem using the simplex
algorithm. The transportation method is a special case of the assignment problem. The method
is, however, computationally inefficient for solving the assignment problem due to the solution’s
degeneracy problem.

The Hungarian assignment method problem, developed by mathematician D. Konig, is a faster

and more efficient approach to solving assignment problems. It involves determining the cost of
making all possible assignments using a matrix. Each problem has a row representing the objects
to be assigned and columns representing assigned tasks. The cost matrix is square, and the
optimum solution is to have only one assignment in a row or column. This method is a variation
of the transportation problem, with the cost matrix being square and the optimum solution being
one assignment in a row or column of the cost matrix.

Examples

Example #1

TechLogistics Solutions, an imaginary delivery company, employs the assignment method to

optimize the distribution of its delivery trucks. They meticulously consider distance, traffic
 conditions, and delivery schedules. TechLogistics efficiently allocates trucks to routes through
strategic assignments, effectively reducing fuel costs and ensuring punctual deliveries. This
method significantly enhances the company’s operational efficiency and optimizes the
utilization of its delivery resources.

Example #2

Suppose XYZ Inc., a manufacturing company, is challenged to efficiently assign tasks to its
machines (A, B, and C). Using the assignment method, XYZ calculates the cost matrix,
reflecting the cost associated with each task assigned to each machine. Leveraging advanced
algorithms like the Hungarian method, the company identifies optimal task-machine
assignments, minimizing overall costs. This approach enables XYZ to streamline its production
processes and enhance cost-effectiveness in manufacturing operations.

Advantages & Disadvantages

Advantages of the assignment method include:

 Resource allocation is carried out in a structured and organized manner.

 Enhancement of resource utilization to achieve optimal outcomes.
 Facilitation of efficient distribution of tasks.
 Improvement in operational effectiveness and productivity.
 Economical allocation of resources.
 Reduction in project completion time.
 Consideration of multiple factors and constraints for informed decision-making.

The disadvantages of the assignment method are as follows:

 Dependence on accurate and up-to-date data for effective decision-making.

 Complexity when dealing with resource allocation on a large scale.
 Subjectivity is involved in assigning values to the resource-requirement matrix.
 Limited flexibility in accommodating dynamic changes or unforeseen circumstances.
 Applicable primarily to quantitative tasks, with limitations in addressing qualitative aspects.
Hungarian Method Steps (Rule)
Step-1: If number of rows is not equal to number of columns, then add dummy rows or columns
with cost 0, to make it a square matrix.
Step-2: a. Identify the minimum element in each row and subtract it from each element of that
row.

b. Identify the minimum element in each column and subtract it from every element of
that column.
Step-3: Make assignment in the opporunity cost table

a. Identify rows with exactly one unmarked 0. Make an assignmment to this single 0 by
make a square ( [0] ) around it and cross off all other 0 in the same column.

b. Identify columns with exactly one unmarked 0. Make an assignmment to this single 0
by make a square ( [0] ) around it and cross off all other 0 in the same rows.

c. If a row and/or column has two or more unmarked 0 and one cannot be chosen by
inspection, then choose the cell arbitarily.

d. Continue this process until all 0 in rows/columns are either assigned or cross off( ).
Step-4: (a) If the number of assigned cells = the number of rows, then an optimal assignment is
found and In case you have chosen a 0 cell arbitrarily, then there may be an alternate
optimal solution exists.

(b) If optimal solution is not optimal, then goto Step-5.

Step-5: Draw a set of horizontal and vertical lines to cover all the 0

a. Tick(✓) mark all the rows in which no assigned 0.

b. Examine Tick(✓) marked rows, If any 0 cell occurs in that row, then tick(✓) mark that
column.

c. Examine Tick(✓) marked columns, If any assigned 0 exists in that columns, then
tick(✓) mark that row.

d. Repeat this process until no more rows or columns can be marked.

e. Draw a straight line for each unmarked rows and marked columns.

f. If the number of lines is equal to the number of rows then the current solution is the
optimal, otherwise goto step-6
Step-6: Develop the new revised opportunity cost table

a. Select the minimum element, say k, from the cells not covered by any line,

b. Subtract k from each element not covered by a line.

c. Add k to each intersection element of two lines.

Step-7: Repeat steps 3 to 6 until an optimal solution is arrived.
Repeat steps 3 to 6 until an optimal solution is obtained.
Unbalanced Assignment Problem
If number of rows is not equal to number of columns then it is called Unbalanced Assignment
Problem.
So to solve this problem, we have to add dummy rows or columns with cost 0, to make it a
square matrix.

Here given problem is unbalanced and add 1 new column to convert it into a balance.
Step-3: Make assignment in the opporunity cost table
(1) Rowwise cell (A,IV) is assigned, so columnwise cell (E,IV) crossed off.

(2) Rowwise cell (B,I) is assigned

(3) Rowwise cell (C,J5) is assigned, so columnwise cell (E,J5) crossed off.

(4) Columnwise cell (D,II) is assigned, so rowwise cell (D,III) crossed off.
Maximization case in Assignment Problem
There may be situation when the assignment problem calls for maximization of profit.
Such problem can be solved by converting the given maximization problem into minimization
problem by substracting all the elements of the given matrix from the highest element.