Game Theory Basics

From NEOS

(1A) Game Theory Basics

-The strategic behavior of human interaction where outcomes depend on the interactive strategies of two or more people

-Two-person, zero-sum: As the name implies it involves two adversaries or players (could be a team, firm, etc.), zero-sum refers to the fact the one player wins all that other player’s losses, or loses all that the other player wins

-Before every game each player knows the possible strategies and the payoff matrix; each player chooses strategies simultaneously, not knowing what the other on is picking

Example: Consider the simple game of odds and evens. In this game each player simultaneously shows either one or two fingers. If the number of fingers shown match, it is even. If they do not match then it is odd. Let us say that player one has chosen odds and if player 1 wins they win the bet of $2. Each player has two possible strategies, show one finger or two fingers. Each player also will either win the bet or lose the bet every game played because they either choose evens or odds. The following is a payoff matrix that represents this simple game.

Assumptions for a successful game

1.) Both players are rational

2.) Bother players are greedy i.e. both promote own welfare