MAHATMA EDUCATION SOCIETY’S

PILLAI COLLEGE OF ARTS, COMMERCE & SCIENCE

NEW PANVEL

PROJECT TITLE
“Understanding Payoff Matrices”

IN PARTIAL FULFILLMENT OF
BACHELOR OF ECONOMICS
SEMESTER V

PROJECT GUIDE:
MS.PRANITI RAJAPURE

SUBMITTED BY:
ANAM SHAIKH
ROLL NO:
7519
Introduction to GAME THEORY
Game Theory is a branch of mathematics and economics that studies strategic interactions
between rational decision-makers, known as "players." The core idea of game theory is to
analyze situations where the outcome for each participant depends not only on their own
decisions but also on the decisions made by others. This is applicable in various fields such as
economics, political science, biology, and computer science.
Game theory came in to existence in 20th Century.
In 1944 John Von Neumann and Oscar Morgenstern published a book Theory of game and
Economic Behaviour,in which they discussed how businesses of all types may use this technique
to determine the best strategies given a competitive business environment

Key Concepts in Game Theory

1. Games: A game in game theory is any situation involving two or more players, where each
player has a set of possible actions or strategies, and the outcome depends on the combination of
these strategies.

2. Players: These are the decision-makers in the game. They can be individuals, groups,
companies, or even nations, depending on the context of the game.

3. Strategies: A strategy is a complete plan of action a player will follow in a given game. It
outlines the choices a player will make at every possible decision point.

4. Payoffs: The payoff is the reward or outcome a player receives from a particular combination
of strategies. Payoffs can be measured in terms of utility, profit, or any other metric that reflects
the player's preferences.

5. Nash Equilibrium: This is a key concept where no player has anything to gain by changing
their own strategy while the other players keep their strategies unchanged. At Nash Equilibrium,
every player's strategy is optimal given the strategies of all other players
Understanding Payoff Matrices in Games
Introduction to Payoff Matrices:
A payoff matrix is a fundamental concept in game theory that serves as a powerful tool for
analyzing strategic interactions between rational decision-makers, referred to as players. In
essence, a payoff matrix is a two-dimensional table that outlines the possible strategies available
to each player and the corresponding outcomes resulting from these strategies. This matrix
provides a visual representation of the payoffs, which are the rewards or penalties that players
receive based on the combination of strategies they choose.
In the context of game theory, players are individuals or entities involved in a strategic decision-
making process. Each player has a set of strategies, which are the possible actions or choices
they can make during the game. The outcome of the game is determined by the strategies
selected by all players, and the payoffs reflect the value of these outcomes for each player. By
analyzing the payoff matrix, players can predict the actions of their opponents and make
informed decisions to maximize their own payoffs.
Key concepts associated with payoff matrices include:
• Players: The decision-makers in the game, each with their own set of preferences and
strategies.
• Strategies: The specific actions or choices that players can employ during the game.
• Payoffs: The numerical values representing the rewards or losses that players receive
based on the chosen strategies.
• Outcomes: The results of the strategic interactions, which depend on the combination of
strategies selected by all players.
The importance of payoff matrices in game theory lies in their ability to illustrate the
interdependencies among players' strategies. They facilitate the analysis of various scenarios,
enabling players to identify optimal strategies and predict potential outcomes, thereby enhancing
their decision-making in competitive environments.
1. Roommates Deciding on a Chore Schedule
 Scenario: Two roommates, A and B, must decide whether to clean the kitchen or the
living room.
 Payoff Matrix:

Roommate B: Kitchen Roommate B: Living Room

Roommate A: Kitchen (3, 2) (2, 1)

Roommate A: Living Room (1, 3) (2, 2)

 Payoffs:
o Roommate A:
 Kitchen: 3 if B cleans the kitchen, 2 if B cleans the living room.
 Living Room: 1 if B cleans the kitchen, 2 if B cleans the living room.
o Roommate B:
 Kitchen: 2 if A cleans the kitchen, 1 if A cleans the living room.
 Living Room: 3 if A cleans the kitchen, 2 if A cleans the living room.

 Best Outcome: Both should clean the living room (2, 2) to ensure a balanced workload.
2. Two Students Deciding on a Study Plan
 Scenario: Two students, Student A and Student B, must choose whether to study
individually or study together.
 Payoff Matrix:

Student B: Study Student B: Study

Student A: Study
(2, 3) (1, 2)
Individually

Student A: Study Together (3, 1) (4, 4)

 Payoffs:
o Student A:
 Study Individually: 2 if B studies individually, 1 if B studies together.
 Study Together: 3 if B studies individually, 4 if B studies together.
o Student B:
 Study Individually: 3 if A studies individually, 2 if A studies together.
 Study Together: 1 if A studies individually, 4 if A studies together.

 Best Outcome: Both should study together (4, 4) to maximize their combined learning
potential.
3. Friends Deciding on a Weekend Activity
 Scenario: Two friends, A and B, must decide between going hiking or going to a movie.
 Payoff Matrix:

Friend B: Hiking Friend B: Movie

Friend A: Hiking (4, 4) (2, 3)

Friend A: Movie (3, 2) (5, 5)

 Payoffs:
o Friend A:
 Hiking: 4 if B goes hiking, 2 if B goes to the movie.
 Movie: 3 if B goes hiking, 5 if B goes to the movie.
o Friend B:
 Hiking: 4 if A goes hiking, 3 if A goes to the movie.
 Movie: 2 if A goes hiking, 5 if A goes to the movie.

 Best Outcome: Both should go to the movie (5, 5) for the highest mutual satisfaction.
4. Colleagues Deciding on a Lunch Spot
 Scenario: Two colleagues, A and B, must choose between a nearby café or a distant
restaurant.
 Payoff Matrix:

Colleague B: Café Colleague B: Restaurant

Colleague A: Café (3, 3) (2, 4)

Colleague A: Restaurant (4, 2) (5, 5)

 Payoffs:
o Colleague A:
 Café: 3 if B goes to the café, 2 if B goes to the restaurant.
 Restaurant: 4 if B goes to the café, 5 if B goes to the restaurant.
o Colleague B:
 Café: 3 if A goes to the café, 4 if A goes to the restaurant.
 Restaurant: 2 if A goes to the café, 5 if A goes to the restaurant.

 Best Outcome: Both should choose the restaurant (5, 5) for a more enjoyable experience.

These case studies demonstrate how different choices impact the outcomes for each player, with
the best outcome usually requiring cooperation or strategic alignment between the players.