ROHINI COLLEGE OF ENGINEERING AND TECHNOLOGY

DEPARTMENT OF MANAGEMENT STUDIES

QUANTITATIVE TECHNIQUES FOR DECISION MAKING

(BA4201)
PROJECT ON GAME THEORY
ASSIGNMENT II

SUBMITTED BY: LEBBAI ROSHAN MUSTAFA

REGISTERED NUMBER:21MBA0027
SEMESTER: II
TABLE OF CONTENTS

1.INTRODUCTION TO GAME THEORY

2.ASSUMPTIONS OF GAME THEORY
3.TYPES OF GAME THEORY
4.STRATEGIES OF GAME THEORY
5.APPLICATIONS OF GAME THEORY
1.Introduction to 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 theory does not insist on how a game should be played
but tells the procedure and principles by which action should be selected.
Therefore, it is a decision theory useful in competitive situations Game is
defined as an activity between two or more persons according to a set of rules at
the end of which each person receives some benefit or suffers loss. The set of
rules defines the game. Going through the set of rules once by the participants
defines a play

2.Properties of a Game
There are finite numbers of competitors called ‘players’) Each player has a
finite number of possible courses of action called ‘strategies’) All the strategies
and their effects are known to the players but player does not know which
strategy is to be chosen) A game is played when each player chooses one of his
strategies. The strategies are assumed to be made simultaneously with an
outcome such that no player knows his opponents strategy until he decides his
own strategy’s)The game is a combination of the strategies and in certain units
which determines the gain orlops’)The figures shown as the outcomes of
strategies in a matrix form are called ‘pay-off matrix)The player playing the
game always tries to choose the best course of action which results in optimal
pay off called ‘optimal strategy)The expected pay off when all the players of the
game follow their optimal strategies is known as ‘value of the game’. The main
objective of a problem of a game is to find the value of the game.
• The decision-making process in situations where outcomes depend upon
choices made by one or more players.
• The word "game" describes any situation involving positive or negative
outcomes determined by the players' choices and, in some cases, chance.

Game Theory - Evolution

• 1921 - Exile Bored, a French mathematicians published several papers on
the theory of games using poker as an example.
1928 - John Von Neumann published his first paper on
game theory in 1928, is made it popular.
1944 — Theory of games and Economic Behaviour by John von Neumann and
Oskar Morgenstern is published.
• 1950 — Prisoner’s Dilemma is introduced, introducing the
dominant strategy theory.
1953 — Solution to non-cooperative games was provided with the evolution of
the Nash Equilibrium.
• 1970 — Extensively applied in the field of biology with the
development of ’evolutionary game theory’.
2007 — Used in almost all the fields for decision making purposes, including
the sofa are to track down the terrorists.

Game Theory - Assumptions

• Each player is rational, acting in his self-interest;
• The players' choices determine the outcome of the game, but each player
has only partial control of the outcome;
• Each decision maker has perfect knowledge of the game and of his
opposition
There are finite number of competitors (players).
The players act reasonably.
Every player strives to maximize gains and minimize losses.
Each player has finite number of possible courses of action.
The choices are assumed to be made simultaneously, so that no player knows
his opponent's choice until he has decided his own course of action.
The pay-off is fixed and predetermined.
The pay-offs must represent utilities.
Game Theory - Classification
• Single Player v Multi-Player Games
• Co-operative v Non-Cooperative Games
• Symmetric v Asymmetric Games
• Zero-sum v non-Zero-sum Games
• Simultaneous v Sequential Games
• Perfect Information v Imperfect Information

1. In a single-person decision, there is only one player. Player is the term used in
game theory for any entity capable of making a decision. Part of game theory is
making assumptions about the behaviour of the players. Our outcome is only as
good as our assumptions. Therefore, a significant part of game theory requires
us to challenge our assumptions. But for today’s lesson, we’ll keep it simple.

We all face multiple decisions every day. A congressman decides how to vote
on a particular bill. A product manager decides to cut a feature before the
release date. Even the trivial decision about which shirt to wear is a daily
occurrence. Each decision we confront has three parts.

Actions, Outcomes, and Preferences

Actions are all the options from which we can choose.
Outcomes are consequences resulting from the actions.
Preferences are the ordering of possible outcomes from most desirable to least
desirable.
Let’s use the trivial decision mentioned earlier of choosing a shirt for the day.
You have two shirts, red with no pattern and the other is blue with a pattern.

We will denote the set actions as A = {r, b} where r represents choosing your
red shirt, and b represents choosing your blue shirt.
Now let’s define the set of outcomes. In this case, X = {x, y} where x is
wearing the red shirt, and y is wearing the blue shirt.

With such a simple example, the difference between actions and outcomes is
subtle. The actions are choosing a specific shirt, and the outcome is actually
wearing a specific shirt. But you’ll get the point just the same.

Outcomes and actions do not always align so closely. For example, an action
may be to reduce spending. The outcome would be heavy layoffs. Although the
outcome is still a consequence of the chosen actions, they are very different
from each other.

Furthermore, the list of possible actions is not always as discrete as our two
shirts example. Perhaps you have an available budget of $50 million, but you
are not required to spend it. Your actions could be a range of A = [$0, $50
million]. Notice the square brackets indication the interval of $0 to $50 million
instead of the {} indicating discrete actions.

*Zero-sum game is a mathematical representation in game theory and economic

theory of a situation which involves two sides, where the result is an advantage
for one side and an equivalent loss for the other. In other words, player one's
gain is equivalent to player two's loss, therefore the net improvement in benefit
of the game is zero.

If the total gains of the participants are added up, and the total losses are
subtracted, they will sum to zero. Thus, cutting a cake, where taking a more
significant piece reduces the amount of cake available for others as much as it
increases the amount available for that taker, is a zero-sum game if all
participants value each unit of cake equally. Other examples of zero-sum games
in daily life include games like poker, chess, and bridge where one person gains
and another person loses, which results in a zero-net benefit for every player. In
the markets and financial instruments, futures contracts and options are zero-
sum games as well.
In contrast, non-zero-sum describes a situation in which the interacting parties'
aggregate gains and losses can be less than or more than zero. A zero-sum game
is also called a strictly competitive game, while non-zero-sum games can be
either competitive or non-competitive. Zero-sum games are most often solved
with the minimax theorem which is closely related to linear programming
duality, or with Nash equilibrium. Prisoner's Dilemma is a classical non-zero-
sum game.
A Non-Zero-Sum Game is a situation where one’s win does not necessarily
mean another’s loss, and one’s loss does not necessarily mean that the other
party wins. In a Non-Zero-Sum Game, all parties could gain, or all parties could
lose. This is in direct contrast to a Zero-Sum Game where one party’s win
necessitates another party’s loss, such as in competitive games like basketball,
where if one team wins, the other automatically loses.
At Walden’s Path School, we believe that Education should be a non-zero-sum
game where everybody wins. It all depends on how you facilitate learning.
Perfect Information and Imperfect Information

An important subset of sequential games consists of games of perfect

information. A game is one of perfect information if all players know the moves
previously made by all other players. Thus, only sequential games can be games
of perfect information because players in simultaneous games do not know the
actions of the other players. Most games studied in game theory are imperfect-
information games. Interesting examples of perfect-information games include
the ultimatum game and centipede game. Recreational games of perfect
information games include chess, go, and mancala. Many card games are games
of imperfect information, for instance poker or contract bridge.

Perfect information is often confused with complete information, which is a

similar concept. Complete information requires that every player know the
strategies and payoffs available to the other players but not necessarily the
actions taken. Games of incomplete information can be reduced, however, to
games of imperfect information by introducing "moves by nature
Symmetric / asymmetric
E F
E 1, 2 0, 0
F 0, 0 1, 2
An asymmetric game
Main article: Symmetric game
A symmetric game is a game where the payoffs for playing a particular strategy
depend only on the other strategies employed, not on who is playing them. That
is, if the identities of the players can be changed without changing the payoff to
the strategies, then a game is symmetric. Many of the commonly studied 2×2
games are symmetric. The standard representations of chicken, the prisoner's
dilemma, and the stag hunt are all symmetric games. Some[who?] scholars
would consider certain asymmetric games as examples of these games as well.
However, the most common payoffs for each of these games are symmetric.

The most commonly studied asymmetric games are games where there are not
identical strategy sets for both players. For instance, the ultimatum game and
similarly the dictator game have different strategies for each player. It is
possible, however, for a game to have identical strategies for both players, yet
be asymmetric. For example, the game pictured in this section's graphic is
asymmetric despite having identical strategy sets for both players

A game is cooperative if the players are able to form binding commitments

externally enforced (e.g., through contract law). A game is non-cooperative if
players cannot form alliances or if all agreements need to be self-enforcing (e.g.
through credible threats).[11]
Cooperative games are often analysed through the framework of cooperative
game theory, which focuses on predicting which coalitions will form, the joint
actions that groups take, and the resulting collective payoffs. It is opposed to the
traditional non-cooperative game theory which focuses on predicting individual
players' actions and payoffs and analysing Nash equilibria.[12][13] The focus on
individual payoff can result in a phenomenon known as Tragedy of the
Commons, where resources are used to a collectively inefficient level. The lack
of formal negotiation leads to the deterioration of public goods through over-use
and under provision that stems from private incentives.[14]
Cooperative game theory provides a high-level approach as it describes only the
structure, strategies, and payoffs of coalitions, whereas non-cooperative game
theory also looks at how bargaining procedures will affect the distribution of
payoffs within each coalition. As non-cooperative game theory is more general,
cooperative games can be analysed through the approach of non-cooperative
game theory (the converse does not hold) provided that sufficient assumptions
are made to encompass all the possible strategies available to players due to the
possibility of external enforcement of cooperation. While using a single theory
may be desirable, in many instances insufficient information is available to
accurately model the formal procedures available during the strategic
bargaining process, or the resulting model would be too complex to offer a
practical tool in the real world. In such cases, cooperative game theory provides
a simplified approach that allows analysis of the game at large without having
to make any assumption about bargaining powers.

Simultaneous games are games where both players move simultaneously, or

instead the later players are unaware of the earlier players' actions (making them
effectively simultaneous). Sequential games (or dynamic games) are games
where later players have some knowledge about earlier actions. This need not
be perfect information about every action of earlier players; it might be very
little knowledge. For instance, a player may know that an earlier player did not
perform one particular action, while they do not know which of the other
available actions the first player actually performed.

The difference between simultaneous and sequential games is captured in the

different representations discussed above. Often, normal form is used to
represent simultaneous games, while extensive form is used to represent
sequential ones. The transformation of extensive to normal form is one way,
meaning that multiple extensive form games correspond to the same normal
form. Consequently, notions of equilibrium for simultaneous games are
insufficient for reasoning about sequential games

Games, as studied by economists and real-world game players, are generally

finished in finitely many moves. Pure mathematicians are not so constrained,
and set theorists in particular study games that last for infinitely many moves,
with the winner (or other payoff) not known until after all those moves are
completed.
The focus of attention is usually not so much on the best way to play such a
game, but whether one player has a winning strategy. (It can be proven, using
the axiom of choice, that there are games – even with perfect information and
where the only outcomes are "win" or "lose" – for which neither player has a
winning strategy.) The existence of such strategies, for cleverly designed
games, has important consequences in descriptive set theory.

Discrete and continuous games

Much of game theory is concerned with finite, discrete games that have a finite
number of players, moves, events, outcomes, etc. Many concepts can be
extended, however. Continuous games allow players to choose a strategy from a
continuous strategy set. For instance, Cournot competition is typically modelled
with players' strategies being any non-negative quantities, including fractional
quantities.

Evolutionary game theory

Evolutionary game theory studies players who adjust their strategies over time
according to rules that are not necessarily rational or farsighted.[35] In general,
the evolution of strategies over time according to such rules is modelled as a
Markov chain with a state variable such as the current strategy profile or how
the game has been played in the recent past. Such rules may feature imitation,
optimization, or survival of the fittest.
In biology, such models can represent evolution, in which offspring adopt their
parents' strategies and parents who play more successful strategies (i.e.,
corresponding to higher payoffs) have a greater number of offspring. In the
social sciences, such models typically represent strategic adjustment by players
who play a game many times within their lifetime and, consciously or
unconsciously, occasionally adjust their strategies

The normal (or strategic form) game is usually represented by a matrix which
shows the players, strategies, and payoffs (see the example to the right). More
generally it can be represented by any function that associates a payoff for each
player with every possible combination of actions. In the accompanying
example there are two players; one chooses the row and the other chooses the
column. Each player has two strategies, which are specified by the number of
rows and the number of columns. The payoffs are provided in the interior. The
first number is the payoff received by the row player (Player 1 in our example);
the second is the payoff for the column player (Player 2 in our example).
Suppose that Player 1 plays Up and that Player 2 plays Left. Then Player 1 gets
a payoff of 4, and Player 2 gets 3.

When a game is presented in normal form, it is presumed that each player acts
simultaneously or, at least, without knowing the actions of the other. If players
have some information about the choices of other players, the game is usually
presented in extensive form.

Every extensive-form game has an equivalent normal-form game, however, the

transformation to normal form may result in an exponential blow-up in the size
of the representation, making it computationally impractical

Strategies
Dominant Strategy —a strategy which dominates irrespective of what the other
player does.
Maximax Strategy — The player books to maximize the maximum pay-opt that
he may stand to gain from the game.
Minimax Strategy — The player books to maximize the
minimum payoff that he receives.
•Collusion — When both players decide to co-operate to maximise their total
output.
Tit for tat — A player reacts to the opponents’ actions by following it, i.e.,
deflection followed by deflection.
Backward induction — The player derives his strategies by working the most
likely strategy of his opponent and then working backwards.
Markov Strategy — A strategy through which a player
decides his actions based only on his present state, ignoring the past states
Applications:
The game theory can be applied to decide the best course in conflicting
situations. In business decisions it has wider possibi-lities. With the help
of computer large number of independent variables can be considered
with mathematical accuracy. The main advantages of this theory are:

1. Game theory provides a systematic quantitative approach for deciding

the best strategy in competitive situations.

2. It provides a framework for competitor’s reactions to the firm actions.

3. It is helpful in handling the situation of independence of firms.

4. Game theory is a management device which helps rational decision-

making.