Game Theory: study of strategic decision making

Game theory is the scientific study of conflict and cooperation between two or more intelligent decision makers. Concepts of game theory apply to those situations where individual’s actions are independent form what others does. It is assumed that information is known to all the individuals. Game theory provides a platform to plan, model, analyze and understand strategic scenarios. The consistency and strong mathematical foundations of game theory makes it an important tool for modelling and decision making in automated interactive environments.

Game theory enables a decision-maker to analyze all the players and their strategic options and helps him consider their preferences and reactions in the process of decision making. Major assumption in game theory is that the players are rational. A rational individual is one who always chooses an action whose outcome is in his best interest, given he has information about other players’ actions.

Dominant strategy can be defined as that strategy which is expected to give the best possible outcome for any action taken by the opponents. A strategy which cannot give the preferred outcome for at least one strategy of the opponents is called as dominated strategy. Any rational player would choose a dominant strategy.

Game theory can be broadly classified into two categories. They are:

• Cooperative game theory
• Non-cooperative game theory

Cooperative game theory: This specifies only what payoffs each player would get by cooperation of its members. The process by which the cooperation is achieved is not specified. Nash equilibrium comes in the framework of cooperative game theory. Nash demonstrated that any finite game will always have an equilibrium point, at which each player chooses actions which give them the best results given opponents’ choices.

Non-cooperative game theory: This is concerned about analyzing the available strategic choices. In this model, details of the ordering and timing of players’ choices are important in determining the result of the game. In this model players are assumed to make decisions out of their own interest. Cooperation can at times occur in this model if an outcome appears to be in everyone’s best interests.

Non-cooperative game theory can be represented broadly in two forms. They are:

• Strategic from
• Extensive form

Strategic from: This is a basic type of representing non-cooperative game theory. This representation is also called as game matrix. This will list each player’s strategies and the outcome of each possible combination of strategies. Outcomes represented by payoffs for each player. Payoff can be simply defined as indicator of a player’s willingness to choose a strategy, given other players’ choices.

Extensive form: This representation is widely known as game tree. It is more detailed than strategic form including complete description about the way the game is played over the time. This model will take into consideration even the order in which various players act. Any game in extensive form can be analyzed directly or can be converted into equivalent strategic form.

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