Game theory

Case study: John Nash

John Forbes Nash, Jr. (born June 13, 1928) is an American economist and mathematician. He is now serving as a Senior Research Mathematician at Priceton University. He shared the 1994 Nobel Memorial Prize in Economic Sciences with game theorists Reinhard Selten and John C. Harsanyi . Nash established the mathematical principles of modern game theory. He published four papers between 1950-53 which made important contributions to both non-cooperative game theory and to bargaining theory. Game theory is the study of how people interact and make decisions. This definition applies to most of the social sciences. What game theory actually does is to apply mathematical models to this interactions under the assumption that each person's behavior has an impact on the well-being of the other participants in the game. These models are often simplified abstractions of real-world interactions because the real world is too messy to analyze with any precision. Any model of the real world must make simplifying assumptions. So what assumptions do we make? The most common are rationality (people want to be happy and they would take whatever actions in order to achive happiness), and common knowledge, (we know that everyone else is trying to make himself or herself as happy as possible, potentially at our expense). A "game" is an abstract representation of many situations. There are many types of games: board games, card games, video games, field games, etc . The most import elements of a game are: the number of players, the strategies they use and the payoffs. We focus on games where: There are 2 or more players. The players chose what strategy to use, The game has one or more outcomes, e.g., someone wins, someone loses. The outcome depends on the strategies chosen by all players; there is strategic interaction. What does this rule out? Games of pure chance, e.g., bingo, slot machines. (Strategies don't matter). Games without strategic interaction between players, e.g., Solitaire.

A bargaining game is one in which two (or more) players bargain over how to divide the gains from trade. The gains from trade are usually represented by a sum of money. If both players in a 2player bargaining game disagree on how to divide the sum of money, (and walk away from the game) then each receives their disagreement value which in many cases equals "no money" e.g., if a movie star and film company cannot come to terms, the movie star doesnt get the work and the film company doesnt get the movie star. Simultaneous Moves Games are about players having to make their strategy choices simultaneously, without knowing the strategies that have been chosen by the other players. They have to consider all of the strategies their opponents may take and they form beliefs (subjective probabilities) about which strategy their opponents are more likely to use. After forming these beliefs, players choose the strategy that is a best response to their beliefs about the play of their opponents and by doing that they maximize their expected payoff. The same is true of the opponents. Badic Sorina, 9C.