R DEFINITIONs

1. Game: It is an activity, between two or more persons, involving actions by each one
of them according to a set of rules, which results in some gain (+ve, -ve or zero) for
each. If in a game the actions are determined by skills, it is called a game of strateggy, if
they are determined by chance, it is termed as a game of chance. Further a game may
befinite or infinite. A finite game has a finite number of moves and choices, while an
infinite game contains an infinite number of them.
2. Player: Each participant or competitor playing a game is called a player Each player
is equally intelligent and rational in approach.
3. Play: A play of the game is said to occur when each player chooses one of his courses

of action.
4. Strategy: It is the predetermined rule by which a player decides his course of action
from his list of courses of actions during the game. To decide a particular strategy. the
player need not know the other's strategy.
. Pure strategy: It is the decision rule to select a particular course of action. It is
always
usually represented by a number with which the course of action is associated.
choose a course of action
Mxed strategy : It is decision, in advance of all plays, to
mixed strategy
play in accordance with some probability distribution. Thus,
or each a
 RESEAR
Sa selection among pure strategies with some fixed probabilities (proportions).
become evident, ,
vantage of a mixed
guessingafter
C Opponents are kept strategy, as tothe pattern
which of the
course
ne has
of action will be adopted by a pl

Mathematically,
play
mixed strategy of a player with m possible courses of actions 1S a set
a
non-negative
whi egative number
which each numbers whose Sum 1s unity, where cach number represents the probability
sum is unity, where cach
course of
course i, then action (pure strategy) is chosen. numoetP
* x, is the probability
Thus if
of chogs
chosen. Thus

X =
(X1, X2, ., Xm)»
where
i =1
and
X20, i= 1,2, ., m.
Eaently a
pure strategy is a special case of mixed strategy in which all but one xj are
A player
only m pure strategies but he has an infinite number of z
may be able to choose
strategies to choose from. mi
mie
.Optimal strateg: The
strategy that puts the player in the most
iTespective of the preferred
is called an optimal strategy. Any posit
strategy of his opponents
from this
strategy would reduce his
payoff devia
8. Zero-sum game : It is a
game in which the sum of
play of the game, is zero. In such a payments to all the players, atter
to the loss of game, the gain of players that win is exactly
players that lose e.g., two
candidates eque
of votes by one is
the loss of votes to the fighting elections, wherein the g
9. other.
Two-person zero-sum game : It is a game
of one player
equals the loss to the other. involving only two players, in which the
It is also called a g
game because the payoff rectangular
matrix is rectangular in form. If there are n game or
mar
sum of the
game is zero, it is called
n-person zero-sum game. The players and
two-person zero-sum game are characteristics o
(a) only two players are involved,
(b) each player has a finite number of
strategies to use,
(c) each specific strategy results in a
payoff,
(d total payoff to the two players at the end of
each play is zero.
10. Nonzero-sum game : Here a party third
the (e.g. "house or a
some payment. A payoff matrix for such a
game is
kitty')
shown below. The receives or mi
each cell is the payoff to A, left-hand entv
TABLE 9.91
Player B
2

Player A
2, 2 - 6, 6

2 6,-6 -2,-2
and the right-hand entry is the payoit to
B. NOte that tor
play
the
(2, 2) sums of the
payolts equal are combination (11,
not to zero. a
11. Payof: It is the outcome of the game. Payof (gain or game) matrix ie th
the amounts received by the playernamed at the let-hand side after all no
table shown
of the game. The payment is made by player named at the top of thé takSble pi
table.
 ANNUIT

ANALYSIS
AND
INVESTMENT

GAMES,
THEORY, Then the gamee
DECISION
courses of action.
B have n
and player below.
courses of action constructed as
described
A have m
be
Let player matrices
which can
available to player A.
described by
a pair of of action
matrix are the B.
courses

he for each to player

designations of action available
(a) Row matrix are the
courses
matrix. The
for each for the other
ay Column designations matrix and to B
of
(6) to A for one the course

et are the payments

entries when A chooses matrix
cell
(c) The the payment to
A in A's payoff
ty cell entry a is action j.
c o u r s e of
hooSin B chooses the will be the negative
action i and
entries in B's payoff matrix
the cell player as
two-person
z e r o - s u m game,
matrix. A is called maximizing
In a
( cell entries in A's payoff minimizing player
as he would
of the corresponding while B is called
maximize the gains,
he would try to
minimize his losses.
try to TABLE 9.92

; are zer Player B

of mixe
1 2 3
dpositio a1 a12 a13 a1j.
deviaia 2 a22 a23 a1 azn
a21
a33 a3j a3n
, after ti Player A 3 as1 a32
ctly equ
n the ga
a3 aij din

h the ga
or matr m aml am2 am3 amj amn
s and t
istics of As payof matrix
TABLE 9.93
Player B

1 2 3

1 -a11 -a12 -a13 .j

.-d23 2
-a21 -a22
or make
i entry -031 -032 -a33 03j . 3n

Player A
-dil -ai3 .. - a j -din

m -aml 4m2 -am3 mj mn

Bs payoff matrix

matrices for A and B is null matrix. Here, the objective is to

a
Thus the sum of payoff players that result in optimum payoff to each.
the optimum strategies of both the
1, 1) and determine used by the other.
the strategy
respective of payoff matrix, keeping in mind that it is just the
we shall usually omit B's
Henceforth,
showing matrix.
ofA's payoff
ble play Megative
 To explain the
above concepts let us consider the following example
EXAMPLE 9.13-1
B are assumed to be equal in .
Table 9.94 illustrates a game, where competitors A and
choice of strategy 1 or strategy 2, while B can select strategy 3 o
and intelligence. A has a :4
TABLE 9.94
Competitor B

Strategy Strategy Minimum

3 4 of row

Strategy 1 +4 +6

Competitor A
Strategy 2 +3 +5

Maximum of column 4 6

Both competitors know the payoffs for possibie strategy. It should be noted that the
every
that favour B would be negative
A since all values are positive. Values
game favours competitor
B. However, since B must play the game
Based upon these conditions, game is biased against
to minimize his losses. There are, in all,
2 x 2=4 possible combinations of the
he will play
strategies. are
The various possible strategies for the two competitors
1 all the time since it has higher
(1) A wins the highest game value if he plays strategy
values than strategy 2.
B realizes this situation and plays strategy 3
in order to minimize his losses since the
(2)
value of 4 in strategy 3 is lower than the
value of 6 in strategy 4.
loses 4 points each time the game
The game value must be 4 since A wins 4 points while B
over a long mumber of plays. The
is played. The game value is the average winnings per play
game illustrated in table 9.94
is a' two-person zero-sum game since A wins 4 points in each play
been determined:
while B loses the same amount. A game is solved when the following has
A and B use their best
(a) the average amount per play that A will win in the long run if
strategies. As explained earlier, it is called the value of the game.
(6) the strategy that A should use to ensure that his average gain per play is at least equ
to the value of the game.
to ensure that his average loss per is no morethan
(c) the strategy that B should use play
the value of the game.