Game theory

Why the game theory may be useful for you?
Game Theory Basic ideas and examples
Because you will play games!
- with your children
- with your spouse
- with your employer
- with your employees
Because games are played!
- during wars
- in politics
- in business

Games involve:
Game Theory Basic ideas and examples
- skill
- strategy
- chance

Game theory: the science of rational behavior in interactive situations
Game Theory Basic ideas and examples

Strategy
Game Theory Basic ideas and examples
Strategic thinking is essentially about your interactions with the others
Game theory is about interactive decision making

Some examples of the games
Game Theory Basic ideas and examples
Rock, paper, scissors
(mixed strategy) http://www.gametheory.net/media/Princess.wmv
Non-studying cartel
(prisoners’ dilemma)
“Flat tire”
High demands, no concessions
“War of attrition”
The dating game
Dziennik vs. GW
(backward reasoning, focal point)
(commitments, reputation)
(chicken game, brinkmanship)
(signaling and screening)
(entry and exit games)

It is high time to play a game
Game Theory Basic ideas and examples
(this time however dogs will play it)

Case Study approach vs. Theory
The player who knows how will usually draw, the player who knows why will usually win
Tom Wiswell – A world champion of checkers
Focus on theory but build it up through cases
Game Theory Basic ideas and examples

Decisions vs. games
Game Theory
Terminology
Decision – I decide without concern for your reaction or response
Game – mutual awareness of the cross-effects actions
I know, that you know, that I know that you know……..

Classifying games
Game Theory
Terminology
Sequential vs. Simultaneous (first/second mover advantage)
Total conflict vs. some commonality (zero-sum games, constant-sum games; usualy non zero sum - war example and Pyrrhic victory (Heraclea 280 B.C. „Another such victory and we are lost!”)
One shot vs. repeated (with the same or changing opponents) (One shot: simpler – no future, but more complicated at the same time – lack of knowledge about the others.)

Classifying games
Game Theory
Terminology
Full vs. equal information (external and strategic uncertainty; games of perfect and imperfect information) (incomplete (asymmetric) information: signals and signaling; screening and screening devices)
Fixed vs. Manipulable rules of game (game and pregame)
Enforceable vs nonenforceable agreements to cooperate (cooperative vs noncooperative games)

Basic concepts and assumptions
Game Theory
Terminology
- Players
- Moves (actions)
- Common knowledge of rules (list of players; strategies available to each; payoffs, assumption about rationality)
- Equilibrium (outcome of the players’ best strategies)
- Rationality (complete knowledge, perfect calculator)
- Strategies (complete plan of action)
- Payoff, also expected payoff (including everything)

Basic concepts and assumptions
Game Theory
Terminology
- Dynamics and evolutionary games
- Observation and Experiment

The use of GT
Game Theory
Terminology
Explanation (why did it happen?)
Prediction
Advice or prescription

It is high time to play a game again
Game Theory
Introduction
21 flags
- 2 players
- 21 flags (coins, bricks)
- sequential, zero-sum,
- Each player can remove 1, 2 or 3 flags
- The player to remove last flag is a winner

It is high time to play a game again
Game Theory
Introduction
21 flags
Find the winning strategy
Homework