#courera.

org
Week1 :
1.1 what is game theory ?
eg: traffic ,Negotiation in business , political campaigndemocratic vs republic
game theory construct a mathematical model to examine how people behave in strat
egic situation
we can solve problem like:
what determine the policies of the two parties ?
what happens to the traffic flow if we constuct a new bypass ?
how can we save time from above decision ?
what is best depends on what others do for above ?
* game theory is now applied to natural science , sociology, psychology, politic
al science
1.2 Modelling social problems as a "game"
"Ad-hoc" approach
Use intution to get answer again and again
but game thoery try to find a unified approach which can be applied to all socia
l problem
All above problem share some common features : 1. Individuals try to do best aga
inst others
2.they have to obey certain rules, they can't do everything.
Socail problem formulated as a mathematical model known as a game
To formulate , we need 3 items : 1. Who participate ie Players , i= 1, 2,....,
2. what each player can do ie Strategy , a_i and r
ange of each strategy A_i
3. Payoff(profit,benefit) to each player ie Payoff
g_i, it depend upon strategy by player 1,2,3,...
ie: g_i(a_1 ,a_2,a_3,.
..)
# for traffic problem
(1) Players = drivers (commuting from city X to city Y)
(2) Stragety of each player { Route a, Route b,....}
(3) payoff of each player = (-traveling time)
j.von.Neumann and O.Morgenstern - father of GT - book 1944 theory of game and ec
onomic behaviour
1.3 In search of governing principle
finding single governing principle as a solution to above social problems
basic idea of "Rationality". Assign Payoff ,higher number for better , lower for
worse and maximize your payoff
# example of roulette and poker
Person A plays Roulette and person A plays poker with Miss B
.....formulating A and Roulette
Behaviour of roulette machine is fixed , A will maximize his profit
....formulating A and B
since behaviour of B is not known, then A will form a expectation / probability
, then maximize his payoff
to predict B behaviour , we need to examine what she is thinking about
known as problem of "infinite regress"
rationality alone fails to pin down individual's behaviour in social problem
simple math model of max. is not enough
1.4 concern about mathematical thoery of human behaviour
1.5 Let's play a game
1.6 John nash discovered the governing principle
Nash discovered that every social problem has a stable point where all individua

ls are doing theier best against the others

known as nash Equilibrium
1.7 Nash Equilibrium
# week 2
2.1 Nash equilibrium and prisoner's dilemma
formulation : g_1(a_1_*, a_2_*) - payoff to player 1 when both player 1
as well as player 2 takes equilibrium decision a_1_* and a_2_*
if player 1 tries to deviate from his equilibrium strategy a_1_*
to a_1 then payoff received will be less then the above. and this true for all
strategy by player 1
similarly for player 2.
ie. for nash equilibrium both player should take their best stra
tegy against each other ( mutual best reply)
property of nash equilibrium : no person can increase his payoff
by deviate from optimal strategy
Simultaneous move game ( static game without timing )
" Game Theory Predict that outcome will be a NASH EQUILIBRIUM "
Prosioner's dilemma : two prisioners broke into a house and were
arrested and then interogated in two different rooms
strategy of prisoner 1 and 2 can be either to co-opertat
e (ie to remain silent) or defect(ie they confess)
if they both co-operate , then they will be sent to jail for 1 y
ear
if they both defect , then they will be sent to jail for 10 yrs
if one defect and other co-operate then the one who defect will
be set free for telling the truth and the one who co-operate will be punished fo
r 15 yrs
hence we make a payoff table( matrix)
considering decision by player 1, if player 2 co-operate then pl
ayer 1 to defect and if player 2 defect then player 1 to defect also, so that pa
yoff is more
ie. both players will decide to defect and that is their NASH EQ
UILIBRIUM (-10,-10)
if each player seeks its own interest / rational behaviour then
NASH EQ. is achieved.
Mutual co-opeartion is better for group as a whole
therefore with group rationality both player must co-operate and
their payoff will be (-1,-1)
ie what is best for group may not be best for each equilibrium
2.2 coordination game and self-fulfilling prophecy
A game may have many NASH EQ.
a NASH EQ. can be better than another for EVERYONE
once a sociey gets into a bad EQ. then it is very diff. to get out
which one prevail depend on peoples expectation
2.3 Market competition
N firms producing pencil
demand curve : P = a - b*X and supply curve is fixed at c (price is c,
elastic)
profit for firm 1 = { ( a - b*(q+Q) ) - c } *q where q is firm 1 produc
tion and Q is total production by others
= b( [ (a-c)/b - Q ] - q ) *q ;
profit as a function of q is a downward quadratic curve.

best reply qunatity to produce according to above function is 1/2 *[ (ac)/b - Q]

let for every firm unit cost is c and produce q_* amount
hence q_* = [ (a-c)/b - (n-1)*q_* ]
solving for q_*
q_* = 1/(n+1) *(a-c)/b
total qty = n/(n+1) * (a-c)/b
for large number of firms ie n tends to infinity then total qty = (a-c)/
b ; the same as determined by demand and supply
2.4 why do people come to play nash eq. ?
to take mutual best reply against each other
1.players are rational / rational reasoning
2.pre-play communication
3. Trial and error adjustment
Rationality + correct beliefs about others behaviour --> Nash eq.