Perfect information A game of imperfect information the dotted line represents ignorance on the part of player 2, formally called an information set An important subset of sequential games consists of games of perfect information.

Put yourself in the shoes of Walter White from Breaking Bad a professor-turned-drug-lord and you have an accomplice Jesse!

You are under investigation by the DEA Drug Enforcement Administration after they managed to trace the whole gamut of illegal activities you were involved in over the period of last two years.

But they have insufficient proof and hence they require a testimony from either of you to go ahead with the prosecution. Both of you are interrogated separately and do not come in any kind of contact whatsoever. Now here are the rules of the game decided behind your back: If you plead not guilty and Jesse confesses defectsJesse will be released and you might have to stay in the jail for twenty years.

Similarly, if Jesse pleads not guilty and you confess, you will be released and Jesse might have to stay in the jail for twenty years. If nobody makes any implications and hold their ground i.

If both of you decide to plead guilty and implicate the other i. What is Game Theory? Game theory attempts to take into consideration the interactions between the participants and their behavior to study the strategic decision-making between rational individuals.

Actions by everyone involved directly alter dynamics of the game, and hence the players are all interdependent. The games can be broadly classified into two categories: In zero-sum games, the loss of one is gain of another.

It is not the case in non-zero-sum games, there can be a net gain or net loss. There might be chances of both cooperation and conflict! Another important feature is — you will learn from the experience and modify your strategy accordingly for the next one.

John von Neumann is the pioneer of the field of game theory. There are two main branches of game theory: As the name suggests, in the cooperative branch a coalition is present between players and the competition is between coalitions of players.

A less pretty girl is indeed better than no girl at all! An efficient and elegant solution indeed! Examples of Game Theory There are multiple real-life examples for understanding the basic concept of game theory.

Let us take up a simple one: As both firms have a stable market reputation, the advertising costs are a direct drain on the net corporate profits. If both do not advertise, their profits will remain the same with many simplistic assumptions, including that there are no other competitors.

But advertising budgets are assigned in both the firms so that they do not lose market share to the competitor spending on advertising is a good strategy for both irrespective of the decision taken by the competitor. The same analogy can be comfortably replicated for the US-USSR cold war, in which both the nations seemed to be hell bent on adding more nukes in their arsenal.

Another common example that we see in everyday life is related to public goods: But an individual might behave in a rogue way selfish?Game theory was pioneered by Princeton mathematician john von neumann. In the early years the emphasis was on games of pure conflict (zero-sum games).

Other games were considered in a cooperative form. That is, the participants were supposed to choose and implement their actions jointly. Game theory. The politics, economics, science and statistical analysis of the games we play and watch. Backing the USSR WADA’s vote to reinstate Russia's anti-doping body is a farce.

A prototypical paper on game theory in economics begins by presenting a game that is an abstraction of a particular economic situation. One or more solution concepts are chosen, and the author demonstrates which strategy sets in the presented game are equilibria of the appropriate type.

BREAKING DOWN 'Game Theory' The focus of game theory is the game, which serves as a model of an interactive situation among rational players. Economics of Game Theory Game study is the study of strategic interaction where one player’s decision depends on what the other player does.

What the opponent does also depends upon what he thinks the first player will do. Applying game theory in your economics exams Game theory analysis has direct relevance to the study of the conduct and behaviour of firms in oligopolistic markets – for example the decisions that firms must take over pricing and levels of production, and also how much money to invest in research and development spending.

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Game theory - Wikipedia