Game Theory

Introduction
• Partial or imperfect information about a problem
– Decisions under risk
– Decisions under uncertainty
• In decisions under uncertainty, competitive situations
exist in which two (or more) opponents are working in
conflict, with each opponent trying to gain at the
expense of the other(s).

 Decision maker is working against an intelligent

opponent.
 The theory governing these types of decision problems
– theory of games.
 Game Theory
• Game theory is a mathematical theory that deals with
the general features of competitive situations.
 Examples:
a. In a war, opposing armies represent intelligent
opponents.
b. Launching advertisement campaigns for competing
products.

• The mathematics of human interactions

• Games represent the ultimate case of lack of information in
which intelligent opponents are working in a conflicting
environment.
Game Theory
The basic elements are follows:
Player: intelligent opponents playing the game

Strategy: a simple action or a predetermined rule to

possible circumstance. The strategy of the player is

all possible actions that he will take for every payoff.
Outcomes or Payoffs: a gain (positive or negative)

for player
Payoff matrix for the player: player’s gain is resulted

from each combination of strategies for the two players.

Two-person zero-sum game: a game with two players,

where a gain of one player equals a loss to the other, so that

the sum of their net winnings is zero.
Game Theory

Zero Sum Game

The sum of the payoffs remains constant during
the course of the game.
Two sides in conflict
Being well informed always helps a player
Non Zero Sum game
The sum of payoffs is not constant during the
course of game play.
Players may co-operate or compete
Being well informed may harm a player.
Strategy of Game Theory

Pure Strategy
It is the decision rule which is always used by the
player to select the particular strategy (course of
action). Thus each player knows in advance all
strategies out of which he selects only one
particular strategy.
Mixed Strategy
Courses of action that are to be selected on a
particular occasion with some fixed probability
are called mixed strategies are called mixed
strategy
Two Person Zero Sum Game
Payoff Matrix
• Payoff is a quantitative measure of satisfaction a
player gets at the end of play.
• It can be market share, profit, etc.
• Gain of one person is loss of other person.
• Thus it is sufficient to construct payoff table for
one player only.
• Each player has available to him a finite no of
possible strategies.
• Player attempts to maximise his gains while player
attempts to minimise losses.
• Decisions are made simultaneously and known to
each other.
• Both players know each other’s payoff’s.
General Payoff Matrix
Player A Player B strategy
Strategy

B1 B2 . Bn
A1 a11 a12 . a1n
A2 a21 a22 . a2n
. . . . .
. . . . .
. . . . .
Am am1 am2 . amn
 Example for Two-player Zero-sum Game
• Coin-matching situation: each of two players A and B selects a
head (H) or a tail (T)
• If the outcomes match (i.e. H and H, or T and T), player A wins
$1 from player B. Otherwise, A loses $1 to B.
• Each player has two strategies (H or T). It is represented in
matrix format.
• 2x2 game matrix expressed in terms of the payoff to player A:

• Player B

Strategy H T

H 1 -1
Player A
T -1 1

Payoff matrix for Player A i.e. Player A’s gain

 Applications of Game Theory
• Mathematics • Psychology
• Computer Science • Law
• Biology • Military Strategy
• Economics • Management
• Political Science • Sports
• International • Game Playing
Relations
• Philosophy
Optimal Solution of Two-person Zero-sum Game
• The value of the game must satisfy the inequality
maximin (lower) value ≤ value of the game ≤ minimax (upper)
value

• Game is said to be stable and follows pure strategy solution

Maximin (lower) value of game = Minimax (upper) value of
game

• Game is said to be unstable and follows mixed strategy

solution
Maximin (lower) value of game ≠ Minimax (upper) value of
game but satisfy
maximin (lower) value ≤ value of the game ≤ minimax (upper)
value
Minimax-Maximin Criterion
Game matrix is payoff matrix for player A, the criterion calls for
player A to select the strategy (pure or mixed) that maximizes his
minimum gain. Player B selects the strategy that minimizes his
maximum losses.

Player A’s selection is maximin strategy, and A’s gain is maximin

(or lower) value of the game.

Player B’s selection is minimax strategy and B’s loss is minimax

(or upper) value of the game.
Saddle Point

Saddle Points; Strictly Determined Games

• A saddle point is an entry that is simultaneously a row
minimum and a column maximum. If a game has one
or more saddle points, it is strictly determined.
• All saddle points will have the same payoff value,
called the value of the game.
• A fair game has a value of zero; otherwise it is unfair,
or biased.
• Choosing the row and column through any saddle
point gives optimal strategies for both players under
the minimax criterion.
Example (2 person sum game)

Union Company Strategies

Strategies
I II III IV Row
Min
I 20 15 12 35 12
II 25 14 8 10 8
III 40 2 10 5 2
IV 5 4 11 0 0
Column Max 40 15 12 35

Maximin = Minimax = Value of Game =12

 Example for Pure strategy solution
Consider the following game whose pay-off matrix is given for player A.

Player B
Strategy 1 2
1 1 1
Player A 2 4 -3

Darla/SMBS/VIT
 Example for Mixed strategy solution
Some games do not possess a saddle point, in which case a
mixed strategy solution is required.
Consider the following game whose pay-off matrix is given for
player A.

Strategy Player
1 B2
1 2 5
Player A 2 7 3

Darla/SMBS/VIT
Example 2: Mixed Strategy Solution

A1 A2
Player B
Player
A B1 B2 B3 B4
8
7 7
A1 2 2 3 -2 6 B4 6
5 5
4 4
A2 4 3 2 6
3 3
2 2
1 1
0 0
-1 -1
-2 p1=4/9 -2
-3 -3

GAME THEORY 17