J.C.

Bose University of Science & Technology, YMCA, Faridabad

Department of Mathematics

GAME THEORY AND ITS APPLICATIONS

PRESENTED BY:
Neha
19001753036
M.Sc. Mathematics
( Semester- IV)

GUIDED BY:
Dr. Neetu Gupta
(Professor and Chairperson)
 OUTLINE
• What is Game Theory?
• History of Game Theory
• Basic Terms used in Game Theory
• Flow Chart of Game Theory
• Rules of Game Theory
• Types of Games
• Arithmetic Method
• Prisoner Dilemma
• Assumptions of a Game
• Limitations of Game Theory
What is Game Theory?

• Game theory is the science of strategy

• The game theory is the process of making decision in certain
situation.
• It also consider how people interact in group
 History of Game Theory
• Von Neumann wrote a key paper in 1928
• 1944:“Theory of Games andEconomic
• Behavior” by von Neumann and Morgenstern
• 1950: Nash invents concept of Nash equilibrium
• Game theory booms after this…
• 1994: Harsanyi, Nash, and Seltenwin Nobel Prize in economics for
game theorywork
Basic Terms used in Game Theory
1. Player
2. Two-person game/ n-person game
3. Zero-sum game/non-zero sum game
4. Strategies
(a)Pure Strategies
(b)Mixed Strategies
5. Saddle point
PLAYER:
The competitor are referred to as player. A player may be individual , a group of
individual, or an organization.

TWO-PERSON GAME/N-PERSON GAME:

• If a game involves only two player(competitors), then it is called a two-person game.

• If number of player are more than two, then game is referred to as n-person game.

ZERO SUM GAME/ NON-ZERO SUM GAME:

In a game, if sum of the gain to one player is exactly equal to the sum of losses to
another player , so that the sum of the gains and losses equals to zero, then the game is
said to be a zero-sum game. Otherwise it is said to be non zero-sum game.
STRATEGY:
• The decision rule by which a player determines his course of
action is called a strategy.
• The strategy for a player is the list of all possible action that he
will take for every
payoff(outcome) that might arise.

PURE STRATEGY:
• This is a decision rule that is always used by the player to select the
particular strategy(course of action). Thus each player know in advance
all strategies, out of which he always selects only one particular strategy ,
regardess of the other player’s strategy.
• The objective of the player is to maximize their gains or minimize their
losses.
MIXED STRATEGY:

• If a player decide in advance, to use all or some of his available

courses of action in some fixed proportion, he is said to use mixed
strategy.
• Thus mixed strategy is a selection among pure strategies with
some fixed probabilities(proportions).

OPTIMUM STRATEGY:

• The particular strategy by which a player optimizes his gains or

losses,
without knowing the competitors strategies, is called optimal
strategy.
PAYOFF MATRIX

The payoff (a quantitative measure of satisfaction that a player gets at the end
of the play) in terms of losses, when player select their particular strategies ,
can be represented in the form of a matrix , called the payoff matrix.
PLAYER Y
Y1 Y2 Y3
24 36 8
PLAYER X , X1 32 20 16
X2

In this pay-off matrix, positive pay-off is the gain to maximizing player (X) and
loss to minimizing player (Y) . E.g. , if X chooses strategy Y1 , then X’s gain is 32
and Y’s loss is 32.
 RULES FOR GAME THEORY
RULE 1: Look for pure Strategy (Saddle point)

RULE 2: Reduce game by Dominance

If no pure strategies exist, the next step is to eliminate certain strategies(row/column)
by law of Dominance.

RULE 3: Solve for mixed Strategy

A mixed strategy game can be solved by different solution method, such as

1.Arithmetic Method
2.Algebraic Method
3. Graphical method
4.Matrix Method
5.Short Cut Method
 Types of games

1. Cooperative or non- cooperative

Cooperative games are the one in which players are convinced to adopt a particular
strategy through negotiations and agreements between players. Let us take the example
cited in prisoner’s dilemma to understand the concept of cooperative games. In case,
John and Mac had been able to contact each other, then they must have decided to
remain silent. Therefore, their negotiation would have helped in solving out the
problem.
2. Zero sum and non- zero sum
In zero sum game, the gain of one player is always equal to the loss of the other player. On
the other hand, non-zero sum game are the games in which sum of the outcomes of all the
players is not zero.
A non-zero sum game can be transformed to zero sum game by adding one dummy player.
The losses of dummy player are overridden by the net earnings of players. Examples of zero
sum games are chess and gambling. In these games, the gain of one player results in the loss
of the other player. However, cooperative games are the example of non-zero games.
3. Simultaneous and sequential

Simultaneous games are the one in which the move of two players (the strategy
adopted by two players) is simultaneous. In simultaneous move, players do not have
knowledge about the move of other players. On the contrary, sequential games are
the one in which players are aware about the moves of players who have already
adopted a strategy.

In sequential games, the players do not have a deep knowledge about the strategies of
other players. For example, a player has knowledge that the other player would not
use a single strategy, but he/she is not sure about the number of strategies the other
player may use. Simultaneous games are represented in normal form while sequential
games are represented in extensive form.
5. Finite and Infinite strategies

Finite games are those in which both players know that the game is being played a
specific (and finite) number of rounds, and that the game ends for certain after that
many rounds have been played. In general, finite games can be solved by backwards
induction.
Infinite games are those in which the game is being played an infinite number of
times. A game with an infinite number of rounds is also equivalent (in terms of
strategies to play) to a game in which the players in the game do not know for how
many rounds the game is being played. Infinite games (or games that are being
repeated an unknown number of times) cannot be solved by backwards induction
as there is no "last round" to start the backwards induction from.
Arithmetic Method
The arithmetic method (also known as short cut method) provide an easy method for finding
optimal strategies for each player in a payoff matrix of size 2*2,without saddle point.
The step of this method are as follows-
Step 1: Find the differences between the two values in the first row and put it against the second
row of the matrix, neglecting the negative sign (if any).
Step 2 : Find the differences between the two values in the second row and put it against the first
row of the matrix, neglecting the negative sign (if any).

Step 3 : Repeat step 1 and step 2 for two column also.

The value obtained by ‘swapping the difference’ represent the optimal relative frequency of play
for both players strategies. These may be converted to probabilities by dividing each of them by
their sum.
 Example: no saddle point in below payoff matrix

Player B Neglect
negative sign.
B1 B2
Player A

2 -1 -1-0=-1 , 1/1+3 = ¼
A1
A2 -1 0
2-(-1) = 3 , 3/1+3= ¾

-1-0=-1 2-(-1) = 3

1/1+3 = ¼ 3/1+3= ¾
Using A’s oddments
Player B plays B1
2*1/4+(-1)*3/4=-1/4
Player B plays
B2 (-1)*1/4+0*3/4=-1/4
Using B’s oddments
Player A plays A1
2*1/4+(-1)*3/4=-1/4

Player A plays A2
(-1)*1/4+0*3/4=-1/4

Therefore the optimum strategy for player A is (1/4,3/4) and player b is (1/4,3/4) and
value of game is -1/4.
From above graph given payoff matrix is reduced to 2*2 matrix and it can be solved by using
arithmetic matrix.
Player B
B3 B4

Player A, A1 3 -2 4 4/9
A2 2 6 5 5/9

8 1
8/9 1/9

Value of game=3*4/9+2*5/9=22/9

Optimum strategy of A is (4/9,5/9) and B is(0,0,8/9,1/9) and value of game is 22/9.

 Prisoner's dilemma
The prisoner’s dilemma, one of the most famous game theory, was
conceptualized by Merrill Flood and Melvin Dresher at the Rand
Corporation in 1950. It was later formalized and named by Princeton
mathematician, Albert William Tucker.1

The prisoner’s dilemma basically provides a framework for understanding

how to strike a balance between cooperation and competition and is a useful
tool for strategic decision-making.
Prisoners Dilemma
• Two crimnals are arrested in the crime of bank robbery and imprisoned
in separate jail so that there is no communication between them .
• The policeman does not have enough evidence to convict the criminals
unless one of them confess.
• Each is offered the following deal:
• If you confess and your partner does not confess ,you will go for 1 year
jail and he will go for 8 year jail.
• If you both confess each will get 5 years jail.
• If neither confess each will get 2 years jail.
ASSUMPTIONS OF THE GAME

• There are finite number of competitors.

• There is conflict of interests between them.
• Each player has available with him finite number of possible strategies(courses of
action).
• One player attempts to maximize gains and the other attempts to minimize losses.
• Players know all possible available choices but does not know which one is going to
be chosen.
• Players simultaneously select their respective courses of action.
• The payoff is fixed and determined in advance.
• Players have to make individual decisions without direct communication.
 1. Chess
We all have played the game chess once or more in our life. It depends
upon the players, how they use the moves to win the game. The rules
of the game are known to both the players and have remained
unchanged which makes it a game of perfect information. So, chess is
an example of game theory as both players know the possible moves
and the effects of those moves.
 2. Rock, Paper and Scissor Game
Have you ever got into disputes with your friend and you couldn’t
decide who is right or wrong? Then the game rock, paper, and
scissors remain the only option and the one who wins; wins the
dispute. In this game like chess, we know the consequences but
are not aware of another player is going to do.
 LIMITATIONS

1. As the number of players increases in the actual business the

game theory becomes more difficult.
2. It simply provides a general rule of logic not the winning
strategy.
3. There is much uncertainty in actual field of business which
cannot be considered in game theory.
4. Businessmen do not have adequate knowledge for the game
theory.
CONCLUSION
Game theory is a classic theory which applicable all most all
the field. The main significant of game theory is to formulate
the alternative strategy to compete with one another and in
the same sense it is an essential tool for decision making
process according to fluctuations in relevant contents. Game
theory is inspiring because the terms and ideology are
comparatively trouble-free than other theories in this
segment. Game theory is the formal study of conflict and
cooperation between intelligent rational decision-makers.