UNIT 1 THEORY

SYLLABUS
Game theory, terminologies of Game Theory, Two person zero sum Games, The maximin-
minimax principle, Game without saddle point - mixed strategies, graphical solution of 2 x n
and m x 2 Games, Dominance property, Decision theory introduction, Decision under
certainty, Decision under risk, Decision under uncertainty and decision tree.

Game theory
Game theory is a type of decision theory in which one's choice of action is determined after
taking into account all possible alternatives available to an opponent playing the same game
rather than just by the possibilities of several outcome results.

Game
Game is defined as an activity between two or more person involving activities by each
person according to a set of rules, at the end of which each person receives some benefit or
satisfaction or suffer loss (negative benefit).

The set of rules defines the Game going through the set of rules by the participants defines
the play
Types of game
A) On the basis of Characteristics of game theory.
There can be various types of games, They can be classified on the basis of the following
characteristics
1. Chance of strategy
If in a game, activities are determined by skills, it is said to be a game of strategy, If they are
determined by the chance, it is a chance game of chance.
In general a game may involve game of strategy as well as game of chance.
2. Number of persons
A game is called as n - person game if the number of person playing is in the person is ‘n’
individual or a group aiming at a particular objective.
3. Number of activities
This maybe finite or in finite.

GHRCCST BCA II SEM IV OPERATIONS RESEARCH II PROF. GAURAV KHOBRAGADE

 UNIT 1 THEORY

4. Number of alternative (choices) available to each person in a particular activity may also
be finite or infinite. A finite game has a finite number of activities, each involving a finite
number of alternatives otherwise a game is said to be infinite.
5. Information to the players about the past activities of other players is completely
available, partly available or not available at all.
6. Payoff - A quantitative measure of satisfaction a person gets at the end of each play is
called a payoff. It is a real valued function of variables in the game.

B) Competitive Game
A competitive situation is called a competitive game if it has a following for properties
i) There are finite number (n) of competitors (Called Players).
ii) Each player has a list of finite number of possible activities.
iii) A play is it said to occur when each player chooses one of his activities.
iv) Every combination of activities determines outcome.

C) Zero Sum and Non – Zero Sum Game

Competitive game are classified according to the number of players involved. i.e. as a two
person game, three person game etc.
If the player make payment only to each other, that is the loss of one is the gain of the other
and nothing comes from the outside, the competitive game is said to be Zero – sum Game.
The game which is not zero - sum is called as non - zero sum Game.

Strategy
A strategy for a given player is a set of rules that satisfy which of the available course of
action we should make at each play.
This strategy may of two kinds,
1) Pure Strategy
If the player select the same strategy each time, then it is referred to as pure strategy. In this
case each player knows exactly what the other player is going to do. The objective of the
players is to maximize games or minimize losses.
2) Mixed Strategy
When the player use a combination of strategies and each player always kept guessing as to
which course of action is to be selected by other player at a particular occasion then this is

GHRCCST BCA II SEM IV OPERATIONS RESEARCH II PROF. GAURAV KHOBRAGADE

 UNIT 1 THEORY

known as mixed strategy. Thus there is a probabilistic situation and objective of the player
player is to maximize expected gains or minimize expected losses.

Two person Zero – Sum Game

A Game with only two players (Say player A and player B) is called two person Zero – Sum
Game if the losses of one player are equivalent to the gains of the other, so that the sum of
their net gain is zero.
Two person Zero – Sum game are also called rectangular Game as these are usually
represented by a payoff matrix in rectangular form.

Payoff Matrix
suppose the player A has m strategies and the player B has n strategies then a payoff matrix
can be formed by adopting the following rules
1. Row designation for each matrix are strategies available to player A
2. Column designation for each matrix are strategies available to player B
3. Cell entries 𝑉𝑖𝑗 is the payment to player A in A’s payoff matrix when A chooses the activity
i and B chooses the activity j
4. With a ‘Zero – Sum’, Two person Game the cell entry in the player B’s payoff matrix will be
negative of the corresponding cell entry 𝑉𝑖𝑗 in the player A’s payoff matrix so that sum of
payoff matrices for player A and Player B is ultimately zaro.
Player A’s Payoff Matrix

Player B
1 2 . . . n
1 𝑉11 𝑉12 . . . 𝑉1𝑛
2 𝑉21 𝑉22 . . . 𝑉2𝑛
Player A . . . . . . .
. . . . . . .
. . . . . .
m 𝑉𝑚1 𝑉𝑚2 . . . 𝑉𝑚𝑛

GHRCCST BCA II SEM IV OPERATIONS RESEARCH II PROF. GAURAV KHOBRAGADE

 UNIT 1 THEORY

Player B’s Payoff Matrix

Player B
1 2 . . . n
1 −𝑉11 −𝑉12 . . . −𝑉1𝑛
2 −𝑉21 −𝑉22 . . . −𝑉2𝑛
Player A . . . . . . .
. . . . . . .
. . . . . .
m −𝑉𝑚1 −𝑉𝑚2 . . . −𝑉𝑚𝑛

Example -
Consider two person coin tossing game. Each player tossed an unbiased coin simultaneously.
Player B pays Rs. 9 to A if {H, H} occur and Rs. 5, if {T, T} occurs; otherwise player A pays Rs. 4
to B. This two person game is zero-sum game, since the winnings of one player are the
looses of the other. Each player has his choices from amongst two pure strategies H and T.
Clearly, the entries in B’s payoff matrix will be just the negative of the corresponding entries
in A’s payoff matrix so that the sum of payoff matrices for player A and B is ultimately a null
matrix.
We generally display the payoff matrix of that player who is indicated on the left side of the
matrix. For example, A's payoff matrix may be displayed as below.

Player B

H T

Player A H 9 -4
T -4 5

The Maximin-Minimax Principle

Maximin Principle
For player A, minimum value in each row represents the least gain (payoff) to him if he
chooses his particular strategy. These are written in the matrix by row minima. He will then
select the strategy that maximizes his minimum gains. This choice of player A is called the
maximin principle, and the corresponding gain is called the maximin value of the game.
Minimax Principle
For player B, maximum value in each column represents the maximum loss to him if he
chooses his particular strategy. These are written in the matrix by column maxima. He will
then select the strategy that minimizes his maximum loss. This choice of player B is called
the minimax principle, and the corresponding loss is called the minimax value of the game.

GHRCCST BCA II SEM IV OPERATIONS RESEARCH II PROF. GAURAV KHOBRAGADE

 UNIT 1 THEORY

If the maximin value equals the minimax value, then the game is said to have a saddle
point, which is also called as equilibrium point, and the corresponding strategies are called
optimum strategies. The amount of payoff at an equilibrium point is known as the value of
the game.
To illustrate maximin-minimax principle, let us consider two-person zero-sum game with the
following 3 × 2 payoff metrix for player A

Player B
𝑩𝟏 𝑩𝟐 Row Minima
𝑨𝟏 9 2 2
Player A 𝑨𝟐 8 6 6 Maximin Value
𝑨𝟑 6 4 4
Column 9 6
Maxima
Minimax
value

Saddle Point
A Saddle point of a payoff matrix is a position of such an element in the payoff matrix which
is minimum in its row and maximum in its column.
Mathematically in payoff matrix {𝑉𝑖𝑗 } the position of element such that

𝑀𝑎𝑥𝑖 [ 𝑀𝑖𝑛𝑗 {𝑉𝑖𝑗 } ] = 𝑀𝑖𝑛𝑗 [ 𝑀𝑎𝑥𝑖 {𝑉𝑖𝑗 } ] = 𝑉𝑟𝑠

Then the matrix is said to have saddle point (r, s).

Rules for determining saddle point

Rule 1. Select the minimum element of each row of the payoff matrix and mark them as .
Rule 2. Select the highest element of each column of the payoff matrix and mark them as
Rule 3. If there appears an element in the payoff matrix marked by and both the
position of that element is a saddle point of the payoff matrix.

Optimal Strategy
The course of action which maximizes the profit of a player or minimizes his loss is called an
Optimal Strategy
If the payoff matrix {𝑉𝑖𝑗 } has the saddle point (r , s) then the player (A and B) are said to have
𝑟 𝑡ℎ and 𝑠 𝑡ℎ optimal strategy respectively.

GHRCCST BCA II SEM IV OPERATIONS RESEARCH II PROF. GAURAV KHOBRAGADE

 UNIT 1 THEORY

Value of the game

The payoff 𝑉𝑟𝑠 at the saddle point (r , s) is called the value of the Game and it is
approximately equal to the maximin value ( V ) and minimax value ( V ) of the Game.

A Game is said to be strictly determinable if Maximin value ( V )= Minimax value ( V ).

A Game is said to be Fair Game if Maximin value ( V )= Minimax value ( V ).

Methods to solve the game without saddle point

1. Analytical method to solve the Game with payoff matrix of order 2 x 2
A 2 x 2 payoff matrix when there is no saddle point can be solved by analytical method.
𝑎11 𝑎12
Consider a payoff matrix [𝑎 𝑎22 ]
21

Co-ordinates are
𝑎22 − 𝑎21
𝑥1 = (𝑎
22 + 𝑎11 ) − (𝑎21 + 𝑎12 )

𝑎11 − 𝑎12
𝑥2 = (𝑎
22 + 𝑎11 ) − (𝑎21 + 𝑎12 )

𝑎22 − 𝑎12
𝑦1 = (𝑎
22 + 𝑎11 ) − (𝑎21 + 𝑎12 )

𝑎11 − 𝑎21
𝑦2 = (𝑎
22 + 𝑎11 ) − (𝑎21 + 𝑎12 )

Optimum Strategies are

𝑆𝐴 = (𝑥1 , 𝑥2 )
𝑆𝐵 = (𝑦1 , 𝑦2 )
Value of the Game is
(𝑎22 𝑎11 ) − (𝑎21 𝑎12 )
V = (𝑎
22 + 𝑎11 ) − (𝑎21 + 𝑎12 )

2. Graphical method
The graphical method is used to solve the Games whose payoff matrix has
i) Two rows and n columns (2 x n)
ii) m rows and two columns (m x 2)

GHRCCST BCA II SEM IV OPERATIONS RESEARCH II PROF. GAURAV KHOBRAGADE

 UNIT 1 THEORY

Steps or Algorithm for solving 2 x n matrix Games

1. Draw two vertical axes 1 unit apart from each other. The two lines are x = 0 and x = 1
2. Take the points on the first row in the payoff matrix on the vertical line x = 1 and the
points on the second row in the payoff matrix on the line x = 0.
3. The point 𝑎1𝑗 on axis x = 1 is then joined to the point 𝑎2𝑗 on the x = 0 to give a straight
line. Draw n straight lines for j = 1, 2, 3……..n and determine the highest point of the lower
envelope obtained, this will be the maximin point.
4. The two or more lines passing through the maximin point determines the required 2 × 2
payof matrix. This in turn gives the optimum solution by making the use of analytical
method.

Steps or Algorithm for solving 2 x n matrix Games

1. Draw two vertical axes 1 unit apart from each other. The two lines are x = 0 and x = 1
2. Take the points on the first column in the payoff matrix on the vertical line x = 1 and the
points on the second column in the payoff matrix on the line x = 0.
3. The point 𝑎𝑖1 on axis x = 1 is then joined to the point 𝑎𝑖2 on the x = 0 to give a straight line.
Draw n straight lines for i = 1, 2, 3……..n and determine the lowest point of the upper
envelope obtained, this will be the minimax point.
4. The two or more lines passing through the minimax point determines the required 2 × 2
payoff matrix. This in turn gives the optimum solution by making the use of analytical
method.

3. Dominance Property
Sometimes it is observed that one of the pure strategies of either player is always inferior to
at least one of the remaining ones. The superior strategies are said to dominate the inferior
ones. Clearly, a player would have no incentive to use inferior strategies which are
dominated by the superior ones. In such cases of dominance, we can reduce the size of the
payoff matrix by deleting those strategies which are dominated by the others. thus if each
element in one row, say kth of the Payoff matrix 𝑎𝑖𝑗 is greater than or equal to the
corresponding elements in some other row, Say rth, then the player A will never choose rth
strategy.

General rules for the dominance

1. If all the elements of a row, say kth, are greater than or equal to the corresponding
elements of any other row, say rth row, then rth row is dominated by kth row.

GHRCCST BCA II SEM IV OPERATIONS RESEARCH II PROF. GAURAV KHOBRAGADE

 UNIT 1 THEORY

2. If all the elements of a column, say kth are less than or equal to the corresponding
element of any other column, Say rth then rth column is dominated by the kth column.
3. Dominated rows or column maybe deleted to reduce the size of the payoff matrix, as the
optimal strategies will remain unaffected
The modified dominance property
The dominance property is not always based on the superiority of pure strategies only. A
given strategy can also be said to be dominated if it is inferior to an average of two or more
other pure strategies.

Decision analysis
Decision theory may be defined as approach which results in the selection from a set of
alternative course of action, The course of action which is considered to be more satisfying
than others or best to meet the objective of the decision problem, as judged by the decision
maker.
Decision-making becomes essential for the management of an organisation or by an
individual when he felt dissatisfied with the existing decision or when alternative course of
actions are available. Decision theory plays an important role in helping the decision maker
to make better decision under uncertain future conditions.
In the present advancing computer age the decision makers of a business organization
cannot afford to make a decision by merely guessing as the wrong decision may lead a
disastrous consequences.
The overall technique that requires the basic knowledge of mathematics, statistics and
computer helps the decision maker to make effective decision in the best interest of the
organization.

Steps in decision theory approach

1) To determine various alternative or strategies.
2) To know the effect of decisions.
3) To determine payoff.
4) Construction of payoff table.
5) Selection of optimum decision criteria.

GHRCCST BCA II SEM IV OPERATIONS RESEARCH II PROF. GAURAV KHOBRAGADE

 UNIT 1 THEORY

Decision-making environment
Decision analysis is used to determine optimum strategies where a decision Maker is faced
with several decision alternatives. We may come across several decision making situations.
1. Decision under certainty
Whenever there exists only one outcome for a decision. We are dealing with this category.
Examples of this are linear programming, transportation, assignment and sequencing, etc.
2. Decision under uncertainty
This refer to situation where more than one outcome can result from any single decision.
Under conditions of uncertainty, only payoff are known and nothing is known about the
likelihood of each state of nature. There are several different criterion.
A. Criterion of Pessimism
Maximin Criterion
The maximin criteria is based upon the conservative approach to assume that the worst
possibility is going to happen. The decision Maker considers each strategy and locates the
minimum payoff for each and then selects that alternative which maximize the minimum
payoff.
This criterion consists of two steps
Step 1. Determine the minimum assured payoff for each alternative
Step 2. To choose that alternative, which corresponds to the maximum of above minimum
payoffs.
Minimax Criterion
When dealing with the costs, the maximum cost associated with each alternative is
considered and the alternative that minimizes this maximum cost is chosen. In this context
the criterion is the minimax criterion and maybe carried out in two steps.
Step 1 Determine the maximum possible costs for each alternative.
Step 2. Choose that alternative which corresponds to the minimum of the above costs.

B. Criterion of Optimism
Maximax criterion
The maximax criterion is based upon ‘extreme optimism’. The Decision maker selects that
particular strategy which corresponds to the maximum of the maximum payoff for each
strategy.
The maximax criteria thus consist of following steps.

GHRCCST BCA II SEM IV OPERATIONS RESEARCH II PROF. GAURAV KHOBRAGADE

 UNIT 1 THEORY

Step 1. Determine the maximum possible payoff for each alternative.

Step 2. Select that alternative which corresponds to the maximum of above maximum
payoffs.
Minimin criterion
The Minimin criterion is based upon ‘extreme optimism’. The Decision maker selects that
particular strategy which corresponds to the minimum of the minimum cost for each
strategy.
The Minimin criteria thus consist of following steps.
Step 1. Determine the minimum possible cost for each alternative.
Step 2. Select that alternative which corresponds to the minimum of above minimum cost.
C. The Savage Criterion
The savage criterion is based on the concept of regret (or opportunity loss) and calls for
selecting the course of action that minimizes the maximum regret. It is alternately known as
the principle of minimax regret.
The basic steps of this criterion are:
Step 1. Determine the amount of regret for payoff of each alternative for a particular event.
The regret amount for the ith alternative when event j occurs, is given by

(𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑝𝑎𝑦𝑜𝑓𝑓 − 𝑖𝑡ℎ 𝑝𝑎𝑦𝑜𝑓𝑓) 𝐹𝑜𝑟 𝑡ℎ𝑒 𝑗𝑡ℎ 𝑒𝑣𝑒𝑛𝑡

𝑖𝑓 𝑡ℎ𝑒 𝑝𝑎𝑦𝑜𝑓𝑓 𝑟𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑝𝑟𝑜𝑓𝑖𝑡.
ith regret =
(𝑖𝑡ℎ 𝑝𝑎𝑦𝑜𝑓𝑓 − 𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑝𝑎𝑦𝑜𝑓𝑓)𝐹𝑜𝑟 𝑡ℎ𝑒 𝑗𝑡ℎ 𝑒𝑣𝑒𝑛𝑡
{ 𝑖𝑓 𝑡ℎ𝑒 𝑝𝑎𝑦𝑜𝑓𝑓𝑠 𝑟𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑠 𝑐𝑜𝑠𝑡𝑠.
Step 2. Determine the maximum regret amount for each alternative.
Step 3. Choose that alternative which corresponds to minimum regrets.

D. Hurwicz Criterion
The Hurwicz criterion stipulates that decision maker’s view may fall somewhere between the
extreme pessimism of the maximum criterion and the extreme optimism of the maximum
criterion. The criterion provides the mechanism by which a balance between extreme
pessimism and extreme optimism is made by weighing them with certain degrees of
optimism and pessimism.
The basic steps of Hurwicz criterion may be summarised as below.

GHRCCST BCA II SEM IV OPERATIONS RESEARCH II PROF. GAURAV KHOBRAGADE

 UNIT 1 THEORY

Step 1. Choose an appropriate degree of optimism (or pessimism) of a decision Maker. Let α
be his degree of optimism so that 1 - α be his degree of pessimism.
Step 2. Determine the maximum as well as minimum payoff for each alternative and obtain
the quantities
h = α x Maximum + (1 – α) x Minimum for each alternative.
Step 3. Select the strategy with minimum value of h.

E) Laplace Criterion
The Laplace criterion uses all the information by assigning equal probabilities to the possible
payoffs for each action and then selecting that alternative which corresponds to the
maximum expected payoff.
The basic steps of this criterion may be summarized as:
Step 1. Assign equal probabilities (1/n) to each payoff of a strategy (having n possible
payoffs).
Step 2. Determine the expected payoff value for each alternative.
Step 3. Select that alternative which corresponds to the maximum of the above expected
payoffs.

3. Decision under risk

These refer to decision situations where the decision maker chooses from among several
possible outcomes where probabilities of occurrence can be stated or determined
objectively from the past data.
Under the condition of risk, the most popular decision criteria for evaluating the alternatives
is the expected monetary value and expected opportunity loss of the expected payoff.
Expected monetary value (EMV) Criterion
The expected monetary value (EMV) for the given course of action is the expected value of
the conditional payoff for that action. The conditional payoffs are obtain for each action by
considering various act-event combinations. The EMV criterion may be summarized as below
Step 1. List conditional profit for each act-event combinations, along with the corresponding
event probabilities.
Step 2. For each act, determine mind the expected conditional profits.
Step 3. Determine EMV for each act.
Step 4. Choose the act which corresponds to the optimal EMV.

GHRCCST BCA II SEM IV OPERATIONS RESEARCH II PROF. GAURAV KHOBRAGADE

 UNIT 1 THEORY

Expected opportunity loss (EOL)

An alternative approach to maximising expected monetary value (EMV) is to minimize
expected opportunity loss (EOL). Expected opportunity loss or expected value of regret are
calculated in the same manner as the extended payoffs in the EMV criterion. Major steps in
the EOL criterion maybe summarised as below:
Step 1. List the conditional profit table for each act- event combination, along with
corresponding event probabilities.
Step 2. For each event, determine the COL (conditional opportunity loss) values by first
locating the most favourable act (maximum payoff) for that event; and then taking the
difference between that conditional profit value and each conditional profit for that event.
Step 3. For each act, determine the expected COL values and sum these values to get the
expected opportunity loss (EOL) for that act.
Step 4. Choose that act which corresponds to the minimum COL value.

GHRCCST BCA II SEM IV OPERATIONS RESEARCH II PROF. GAURAV KHOBRAGADE

 UNIT 1 THEORY

GHRCCST BCA II SEM IV OPERATIONS RESEARCH II PROF. GAURAV KHOBRAGADE