Professional Documents
Culture Documents
y Rules-Are the guidelines and restrictions of who can do what and when they can do it
within a given game or games.
y Payoff-is
P ff i theh amount off utility
ili (usually
( ll money)) a player
l wins
i or lloses at a specific
ifi stage
of a game.
y Strategy-
gy A strategy
gy defines a set of moves or actions a player
p y will follow in a given
g
game. A strategy must be complete, defining an action in every contingency, including
those that may not be attainable in equilibrium
y Dominant Strategy
gy -A strategy
gy is dominant if,, regardless
g of what anyy other players
p y
do, the strategy earns a player a larger payoff than any other. Hence, a strategy is
dominant if it is always better than any other strategy, regardless of what opponents may
do.
Important Review Questions for Game
Theory
Th
Strategy
St t
y Who are the players?
y What strategies are available?
y What are the payoffs?
3. A specified payoff for each player is associated with each end-state (a ZERO-SUM
game means that the sum of payoffs to all players is zero in each end-state).
4. Each decision maker has perfect knowledge of the game and of his opposition; that is,
he knows in full detail the rules of the game as well as the payoffs of all other players.
5. All decision makers are rational; that is, each player, given two alternatives, will select
the one that yields him the greater payoff.
Cooperative Vs.
Vs Non-Cooperative
Non Cooperative
y Cooperative Game theory has perfect communication
andd perfect
f contract enforcement.
f
A non-cooperative
ti game is
i one in
i which
hi h players
l are
unable to make enforceable contracts outside of those
specifically
p y modeled in the ggame. Hence, it is not defined
as games in which players do not cooperate, but as games
in which any cooperation must be self-enforcing.
I t d
Interdependence
d off Player
Pl Strategies
St t gi
1) Sequential – Here the players move in sequence, knowing
the other players’ previous moves.
- To look ahead and reason Back
2) Simultaneous
S l – Here
H the h players
l act at the
h same time, not
knowing the other players’ moves.
- Use Nash Equilibrium to solve
Simultaneous-move Games of Complete
Information
For each p
player,
y , a set of strategies/actions
g /
{Player 1, S1, Player 2,S2 ... Player Sn
Sn}
y A player’s best strategy is that strategy that maximizes that player’s payoff
(utility), knowing the strategy's of the other players.
y So when each player within a game follows their best strategy, a Nash
equilibrium will occur.
Logic Logic
Definition: Nash Equilibrium
In the normal-form
normal form game {S1 , S2 , ..., Sn , u1 , u2 , ...,
un}, a combination of strategies (s1*,...,sn* ) is a Nash
equilibrium if, for every player i, G e others’
Given ot e s
ui (s1*,...,si*−1, si*, si*+1,...,sn* ) choices, player i
cannot be better-off
≥ ui (s1*,...,si*−1, si , si*+1,...,sn* ) if she deviates from
si *
for all si ∈ Si . That is, si* solves
Maximize ui (s1*,...,si*−1, si , si*+1,...,sn* )
Subject to si ∈ Si
Nash’s Equilibrium cont.:
B
Bayesian
i N
Nash
h Equilibrium
E ilib i
y The Nash Equilibrium of the imperfect-information game
y All p
players
y have the same pprior beliefs about the pprobabilityy distribution
on nature’s moves.
– So for example, all players think the odds of player 1 being of a particular type is p,
and the probability of her being the other type is 1-p
B
Bayes’
’ Rule
R l
• A mathematical rule of logic explaining how you should change
your beliefs
b li f in
i light
li ht off new information.
i f ti
• Bayes
Bayes’’ Rule:
P(A|B) = P(B|A)*P(A)/P(B)
• To use Bayes
Bayes’’ Rule,
Rule you need to know a few things:
– You need to know P(B|A)
– You also need to know the probabilities of A and B
Examples of Where Game
Theo Can Be Applied
Theory
y Zero-Sum Games
y Prisoner’s Dilemma
y Non-Dominant Strategy moves
y Mixing Moves
y Strategic Moves
y Bargaining
g g
y Concealing and Revealing Information
Zero-Sum Games
Penny Matching:
y Each of the two players has a penny.
y Two players must simultaneously choose whether to show the Head or the Tail.
y Both
B h players
l kknow the
h ffollowing
ll i rules:
l
-If two pennies match (both heads or both tails) then player 2 wins player 1’s penny.
-Otherwise, player 1 wins player 2’s penny.
Player 2
Head Tail
Head -1 , 1 1 , -1
Player 1
Tail 1 , -1 -1 , 1
Prisoner’s Dilemma
y No communication:
- Strategies must be undertaken without the full
knowledge of what the other players (prisoners) will do.
1 year for
Confess
Both g
get 5 Bill
years 10 years for
Bill Ted
10 years for
Not Confess Bill Both g
get 3
1 year for years
Ted
Solving Prisoners’ Dilemma
y Confess is the dominant strategy for both Bill and Ted.
y D
Dominatedd strategy
-There exists another strategy which always does better regardless of other players’
choices
-(Confess Confess) is a Nash equilibrium but is not always the best option
-(Confess,
Players Ted
Strategies C f
Confess Not Confess
f
Ted
Best Strategies
Mixing Moves
Examples in Sports (Football & Tennis)
Strategic Moves
War –Cortes Burning His Own Ships
Bargaining
Splitting a Pie
Concealing and Revealing Information
Bluffing in Poker
Applying Game Theory to NFL
y Solving a problem within the Salary Cap.
y How should each team allocate their Salary cap. (Which
position should get more money than the other)
y The Best strategy is the most effective allocation of the
team’s money to obtain the most wins.
y Correlation can be used to find the best way to allocate
the team’s money.
What is a correlation?
y A correlation examines the relationship
p between two measured
variables.
- No manipulation by the experimenter/just observed.
- E.g., Look at relationship between height and weight.
y You can correlate any two variables as long as they are numerical
((no nominal
i l variables)
i bl )
y Is there a relationship between the height and weight of the students
in this room?
- Of course! Taller students tend to weigh more.
Salaries vs
vs. Points scored/Allowed
Position Correlatio T-test Position Correlatio T-test
n n
RB .27 2.67 DE .25 2.52
k .25 2.52 CB .15 1.48
TE .17
17 1 74
1.74 S .06
06 .61
61
WR -.03 -.30 P 0 0
y There's
Th ' high
h h riskk in general,
l bbut more so at some positions
over others in spending large chunks of your salary cap space.
Future Study
y Increase the Sample size.
y Cluster Analysis
y Correspondence analysis
y Exploratory Factor Analysis
Conclusion
There are many advances to this theory to help describe and
prescribe the right strategies in many different situations.
Although the theory is not complete, it has helped and will
continue to help many people,
people in solving strategic games.
games
References
y Nasar, Sylvia (1998), A Beautiful Mind: A Biography of John Forbes Nash, Jr.,Winner of the Nobel Prize
in Economics, 1994. Simon and Schuster, New York.
y Rasmusen, Eric (2001), Games and Information: An Introduction to Game Theory, 3rd ed. Blackwell,
Oxford.
y Gibbons, Robert (1992), Game Theory for Applied Economists. Princeton University Press,
Princeton NJ.
Princeton, NJ
y Mehlmann, Alexander. The Games Afoot! Game Theory in Myth and Paradox. AMS, 2000.
y Wiens, Elmer G. Reduction of Games Using Dominant Strategies.Vancouver: UBC M.Sc. Thesis,
1969.
y H. Scott Bierman and Luis Fernandez (1993) Game Theory with Economic Applications, 2nd ed.
(1998), Addison-Wesley Publishing Co.
y D. Blackwell and M. A. Girshick (1954) Theory of Games and Statistical Decisions, John Wiley &
S
Sons, New
N Y York.
k
y NFL Official, 2004 NFL Record and Fact Book; Time Inc. Home Entertainment, New York,
New York.
Game Theory