Game Theory

http://msl1.mit.edu/ESD10/block4/4.4_-_Game_Theory.pdf

Summary:

Game theory is the branch of decision theory concerned with interdependent decisions. Participants, or players, in a situation, or game, compete to achieve objectives with similar resources. The goal of game theory is not necessarily to "win," but rather to identify an optimal strategy. The sequence of moves a player uses is called a "strategy," and does not need to be wholly unique.

There are two categories of games: sequential and simultaneous. In sequential games, participants take turns acting. The basic strategic rule when applying game theory in this situation is to "look ahead and reason back." This starts with the last decision to be made, then working back through the problem to choose the course of action the other player would make until an initial decision needs made.


Simultaneous games require a more robust analysis due to their overall complexity. There is no "final move" per say in these games. In simultaneous games all possible combinations must be laid out. Players in this type of game should identify their dominate strategy and dominated strategy, the later should never be employed. Thus, the overall range of choices can be limited. Players then can go back to assess if there is another dominate strategy they can employ from the remain outcomes, as well as determine if there is another dominated strategy. This sequence can be replicated until a final strategy is reached, or if a dominate strategy is no longer evident.


In simultaneous games, comptitors without a clear dominate strategy should seek out equalibrium in relation to the other. Equilibrium is reached when both competitors do not have an incentive to change strategy.