What is Game Theory? A Basic Introduction and Example

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Game Theory is one of the most fascinating branches of mathematics with tons of applications to fields ranging from the social sciences to the biological sciences. Game theory has even found its way into mainstream media through movies such as A Beautiful Mind, with Russell Crowe.

This hub will explain some of the fundamentals of game theory and work through a simple example. As a result, this hub will provide you with the background needed to understand some really cool games that I will write about in future hubs.


Definition of a "Game":

Game theory is the study of "games". Games, in the mathematical sense, are defined as strategic situations in which there are multiple participants. Furthermore, the outcome of the decision any individual makes is dependent on the decision that individual's decision and the decisions made by all of the other participants.

Is Sudoku a "game" ?

No, not the way we defined "game". Sudoku is not a "game" because what you do when solving the game is independent of what anyone else does.

Is Chess a "game" ?

Yes! Imagine that you are playing a game of chess with a friend. Whether you win or not will be dependent on the moves you make and the moves your friend makes. At the same time, whether or not they win will be dependent on the moves they make and the moves you make.

NOTE: The most important thing to realize in the chess example is that at least 2 "participant's" decisions were affected by the decisions of other participants. Solving a Sudoku puzzle is not a game since how you solve the puzzle is not affected by anyone else's decisions.

Ok, I get what a "game" is, but what is Game Theory?

Game Theory is the study of "games". Game Theorists tries to model "games" in a way that makes them easy to understand and analyze. A lot of "games" end up having similar properties or reoccurring patterns but sometimes it is hard to understand a complicated game.

Lets work through an example of a game and how a game theorist might model it.

Example: The Game of Chicken

Consider the "game" of chicken. In the game of chicken we have 2 people, Bluebert and Redbert, who drive their cars at full speed towards each other. They each have to make the decision just before crashing to either drive straight ahead or to swerve at the last minute. The possible results are as follows:

Bluebert
Redbert
Result
Goes Straight
Goes Straight
They Crash
Goes Straight
Swerves
Bluebert is happy he wins, Redbert is sad he loses
Swerves
Goes Straight
Bluebert is sad he loses, Redbert is happy he wins
Swerves
Swerves
They stare at each other shocked at what they've done

Now that we know the general results, this isn't the easiest way of understanding the game. Lets reorganize the possible results into a matrix. 

This is called a payoff matrix. The rows represent the possible actions of Bluebert. The columns represent the possible actions of Redbert. Each box represents the result from each combination of decisions. By using this matrix, it is easy to see what the result of different combinations of actions is.

A quick example: If Bluebert swerves, then we know the result will be one of the top 2 boxes, depending on what Redbert decides to do. On the other hand, if Blubert goes straight, then we know the result will be one of the bottom 2 boxes, depending on what Redbert decides to do.


Lets replace the illustrations of the results with some numbers to make things easier to analyze.

Both swerving and staring at each other= 0 for both

Both going straight and crashing = -5 for both

One swerving and one going straight = 1 for the winner(straight) and -1 for the loser(swerve)

Some Simple Analysis:

Now that we have organized this game theoretic "game" into an easily readable payoff matrix, lets see what we can learn about how the game will be played out.

BEST RESPONSE:

The first thing we will look at is something called a best response. Essentially, lets imagine that we are Bluebert and we KNOW what Redbert will do. How do we react?

If we KNOW Redbert will swerve, we need only look at the left column. We see that if we swerve we get 0 and if we go straight, we get 1. So the best response is to go straight.

On the other hand, if we KNOW Redbert will go straight, we need only look at the right column. We see that if we swerve we get -1 and if we go straight, we get -5. So the best response is to go straight.

In this game, Redbert has similar best responses.

NASH EQUILIBRIUM:

If you have seen the Ron Howard movie, A Beautiful Mind, with Russell Crowe, you may remember that it was about the Mathematician John Nash. Nash Equilibriums are named after this very Nash!

A Nash Equilibrium is when all players play a best response. In the game of chicken above, both players going straight is not a Nash Equilibrium because at least one player would have preferred to swerve. In the game of chicken, both players swerving is not a Nash Equilibrium because at least one player would have preferred to go straight.

However, when one player swerves and one player goes straight, this is a Nash Equilibrium because neither player can improve their outcome by changing their action. Another way of saying this is that both players are playing a best response.

Final Thoughts

If you've made it this far congrats! You've learned the basics of game theory. It wasn't the most fun we can have with game thoery, but it did lay a solid foundation for us to look at some really cool examples and techniques in the future.

I'm going to follow up on this hub with a series of Game Theory Hubs that look at some really cool games, including the famous prisoner's dilemma, the centipede game, and even some evolutionary game theory. If you think that would interest you, consider following me so you can be informed when I post new Game Theory hubs.

If you have questions, comments, or suggestions, please let me know. In particular, if something was unclear above, let me know so I can try to explain it better. Thanks!


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Comments 15 comments

Tiny 4 years ago

My 1st intro to Game Theory. still not quite sure how this works but am willing to follow u and see where it leads.


Adam 4 years ago

I think there's a mistake in this, in the following paragraph:

"On the other hand, if we KNOW Redbert will go straight, we need only look at the right column. We see that if we swerve we get -1 and if we go straight, we get -5. So the best response is to go straight."

Surely the last word should be "swerve"?


Keith 4 years ago

how come you chose going straight is the the best response were you get -5, where's the best to get -1 or -5?


Luca 4 years ago

I agree with Adam and Keith, probably just a 'typo' anyway.

Cool intro though, what about the promised follow-up? ;)


Kerri 3 years ago

I'm relieved to see these comments, because as I was reading, I, too, wondered why the author chose "straight" as opposed to "swerve" as the best response to Redbert going straight. I am an Economics major, and I've learned in Game Theory that you choose the best outcome that will give you the benefit, more points, etc. So, it definitely seems like that was merely a typo. :)


Tiffany 3 years ago

I was there trying to figure out the samething, luckily I decided to read the comments :)


3 years ago

When I found the mistake written above, I thought that I was wrong until I read the comments. haha

I like this page very much. It is really helpful for me. Do you have any other pages for Game Theory and non-linear programming? thanks :))


equerrylondon 3 years ago

As a complete novice, looking sat Game Theory for the first time, surely a crash can result if both drivers swerve in the same direction ie red swerves left and blue swerves right?


Alan 3 years ago

Well done, really well presented and thoughtful!


amadMalaysia 3 years ago

is it so crucial information for the beginners! i need a lot of explanation for my Final Year Project dude!


Furthermore, the outcome of the decision any individual makes is dependent on the decision that individual's decision and the decisions made by all of the other participants. 3 years ago

Furthermore, the outcome of the decision any individual makes is dependent on the decision that individual's decision and the decisions made by all of the other participants.


Chege Njenga 2 years ago

I like the introduction. Feel more confident of understanding this theory


Jjam 21 months ago

I think that it wasn't a typo in regards to the 'bluebert' going straight and getting (-5). If 'redbert decides to go straight and 'bluebert' decides to swerve then the 'redbert' would've gotten 1 and 'bluebert' would've gotten -1 and that wouldn't have been the best response as 'redbert' would've won. If 'bluebert' chose straight when 'redbert' chose straight then both players would've gotten (-5) and it would've been a tie. so 'bluebert' going straight would've been the best response as instead of losing he would've tied with 'redbert'. But logically speaking i would've chose swerve if i know the other player decided to go straight as that means that guy is suicidal and i'm not ready to die yet lol. But as it relates to a game. Then straight would've been the best response. That's what I think.


ALI 13 months ago

V W X Y Z SUPPLY

A 1 9 13 36 51 50

B 24 12 16 20 1 100

C 14 33 1 23 26 150

DEMAND 100 70 50 40 40


ALI 13 months ago

V W X Y Z SUPPLY

A 1 9 13 36 51 50

B 24 12 16 20 1 100

C 14 33 1 23 26 150

DEMAND 100 70 50 40 40

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