1. Game Theory Flashcards
Rational decision maker
Someone who’s decisions can be accurately modelled
Actions
The alternatives from which a person can choose
Outcomes
The consequences that result from each possible action
Preferences
The player’s personal ranking over possible outcomes
What does X represent?
Outcome space
What makes a preference rational?
Completeness and transitivity
Completeness
When any two outcomes can be ranked by the preference relation
Transitivity
If a>b and b>c then a>c
When does a player follow a possible choice paradigm?
- They know all possible actions, A
- They know all possible outcomes, X
- They know the relationship between actions and outcomes
- They have rational preferences over outcomes
Lottery
A finite set of outcomes with an associated probability to each outcome
Independence axiom
States if x1>x2 then px1 + (1-p)x3 > px2 + (1-p)x3 for all 0<p></p>
Continuity axiom
If x1>x2>x3 then there exists p such that px1 + (1-p)x3 = x2
What is a normal game?
Step 1: each players chooses a strategy simultaneously and independently
Step 2: conditional on players choices, payoffs are distributed to each player
What is a payoff function?
It maps every combination of pure strategies to a player n’s payoff
Strategy profile
A possible combination of all players strategies
Dominant strategy
When one strategy produces a higher payoff regardless of the strategies chosen by other players
What is IESDS?
Iterated Elimination of Strictly Dominating Strategies. Where we remove dominating strategies from the game
Nash equilibrium
A strategy profile where no individual has a unilateral incentive to change their behaviour. It is a concept of stability
Best response correspondence
A mapping from strategies for all players other than n into the subsets of Sn
How do you find a players best response when given a utility function
- Maximising for each s2
- FOC sets this equal to 0
- since the best responses are unique, a NE is formed and the best responses found
If there is no pure strategy how can you best play the game?
Randomise between strategies
What will a rational decision maker do when facing randomness in others choices?
Pick his strategy to maximise his expected payoff
When will players mix between pure strategies?
When they are indifferent between them
What is a function?
Something that maps one input to one output