What is... Game Theory?

By Megan Fava
A BSTRACT
Game theory is a branch of mathematics used primarily in economics, political science, and
psychology. This talk will define what a game is and discuss a variety of ways in which games
can be classified and described. Later, I will introduce a concept known as the Nash equilibrium,
which is a state of a game in which no player has incentive to change his strategy after considering
the strategies of other players.

W HAT IS G AME T HEORY ?

A game, in the mathematical sense, is a situation in which players make rational decisions
according to defined rules in an attempt to receive some sort of payoff. Game theory is the branch
of mathematics which focuses on the analysis of such games. Game theory can be divided into two
main subdisciplines: classical game theory and combinatorial game theory.
Classical game theory studies games in which players move, bet, or strategize simultaneously.
As a result, players often find themselves ignorant to certain aspects of the game. Players of
these games are more likely to depend on prediction and chance due to this lack of information.
Examples include poker or rock, paper, scissors.
Combinatorial game theory, on the other hand, is the study of two-player games in which each
player has complete knowledge of all aspects of the game throughout the entirety of gameplay.
These games are usually played on a turn-by-turn basis and do not typically involve elements of
chance. Examples include chess or checkers. Furthermore, combinatorial games are said to be
impartial if all players have the same set of possible moves from each position. Otherwise, the
game is said to be partizan.

C LASSIFICATION OF G AMES
In addition to the two classifications presented above, games can be classified in a variety of
ways. One of the most obvious is to classify a game by the number of players. It is common to
describe a game as an n-person game, where n is an integer greater than or equal to 1 representing
the number of players required to participate in a particular game.
The order in which players move (or lack thereof) is another easy way to classify games. Play-
ers all make their move at the same time in a simultaneous game. Contrarily, in a sequential game,
only one player may move at any given time. Some games may not necessarily fall into either of
these categories.
Games can also be classified based on the total possible winnings. A constant-sum game or
zero-sum game is one in which the sum of total possible winnings remains constant no matter what
actions the players take; that is, the sum of the winnings gained by some players must be equal to
the sum of the other players’ losses. In poker, for example, players compete for a constant sum of
money. The decisions of each player do not affect the available winnings. In variable-sum games,
however, the total available winnings may change depending on the payers’ actions. The prisoner’s
dilemma is an example of a variable-sum game.

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 Variable-sum games can be divided even further into the following subgroups: cooperative and
non-cooperative games. Players of cooperative games are permitted to make binding agreements,
such as an enforceable contract, while players of non-cooperative games may not create any bind-
ing arrangements. For example, imagine there are two individuals, a seller and a buyer, hoping to
complete a business transaction. As they attempt to negotiate a price, the individuals are partici-
pating in a non-cooperative game. If the buyer signs a contract agreeing to pay a specific price, it
then becomes a cooperative game.

R EPRESENTATION OF G AMES
There are a variety of ways in which we may describe games. The first we will discuss is known
as extensive form. In this method, the sequence of choices made in a game are depicted using a
game tree. The payoff for each possible sequence is noted at the end of each of the final branches.
Consider, for example, the following partial game tree for a game of Tic-Tac-Toe between two
players:

Since rotations and reflections are equivalent, Player 1 has three possible moves, as pictured above.
Player 2’s possible moves change depending on the choice made by Player 1. If we were to further
extend the tree, we would see what moves Player 1 could make following Player 2’s decision. We
could draw a complete tree to see all possible outcomes from all possible move sequences. Note
that extensive form can be used to describe simultaneous games as well by using dashed lines to
indicate that a player is unaware of which node he is in.

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 Although games can be validly described in extensive form, they may be more clearly described
using normal form, also known as strategic form. For this reason, normal form is more commonly
used to describe simultaneous games (typically with two players). In normal form, a game is
represented using a matrix which describes the outcomes for both players for any combination of
moves. For example, consider the following matrix depicting the prisoner’s dilemma game:

The players and all of their possible moves are placed on adjacent sides of the matrix. The payoffs
are placed inside the matrix. In this case, all of the payoffs are negative, since they represent time
spent in jail. From the matrix pictured above, we see that if both prisoners confess, they each spend
8 years in jail. If only one prisoner confesses, he walks away with no jail time, while the other
player must spend 10 years in jail. If both prisoners lie, they each spend only 1 year in jail.
Finally, cooperative games can be represented in characteristic function form. This method is
somewhat different than the other two in that it examines the payoff for the group of players as a
whole rather than considering individual decisions and payoffs. Denote the (finite) set of all players
of a game by N = {1, 2, . . . , n}. A coalition C ⊆ N is any subset of players. Note that we are going
to assume transferable utility, meaning we can assign one payoff to the whole set of players N (or
any coalition C) and allow it to later be arbitrarily distributed among the individual players within
the group. Under this assumption, we may define the characteristic function form as a tuple hN, vi,
where N is the set of all players (as previously stated) and v : 2N → R is a function which maps
every possible coalition C ⊆ N to its payoff v(C). Assume v(∅) = 0. The characteristic function
of a cooperative game describes the collective payoff a set of players might receive by forming a
coalition. It helps us decide which coalitions should form in order to receive the largest (collective)
payoff. I will provide an example of this on the next page.

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Example. Consider a set of players N = {1, 2, 3}. Players 1 and 2 each possess a right-hand glove,
while Player 3 possesses a left-hand glove. The gloves are worth nothing on their own, but a
pair (consisting of a right- and left-hand glove) is worth $10. We can construct the characteristic
function hN, vi as follows:
v (∅) = 0
v ({1}) = v ({2}) = v ({3}) = 0
v ({1, 2}) = 0
v ({1, 3}) = v ({2, 3}) = 10
v(N) = 10
It is easy to see from the above that Players 1, 2, and 3 all gain nothing if they do not form
coalitions. Moreover, Players 1 and 2 receive no benefit by forming a coalition with each other.
However, if Players 1 and 3 or 2 and 3 form a coalition with each other, they receive a collective
payoff of $10. The same is true for the entire set of players N. Looking at the characteristic
function v allows us to more easily determine if it would be beneficial to form coalitions, and, if
so, which coalition(s) would result in the highest collective payoff.

T HE NASH E QUILIBRIUM
The Nash equilibrium is a concept which was originally presented by American mathematician
John Nash (1928-2015). A non-cooperative game is said to be in Nash equilibrium if no player
has incentive to change his individual game strategy after considering the strategies of all other
players. The prisoner’s dilemma is a classic example of the Nash equilibrium. As a reminder, the
prisoner’s dilemma is a situation in which two prisoners are convicted as accomplices in a crime.
The prisoners are placed in solitary confinement, so they have no method of communicating with
each other. They are then each presented with the following proposal:
i. If they both confess, they will each spend 8 years in jail.
ii. If only one of them confesses, he will be set free while the other will spend 10 years in jail.
iii. If neither of them confesses, they will each spend 1 year in jail.
This game is in Nash equilibrium when both prisoners confess. Why? Because under these
circumstances, neither prisoner benefits by changing his strategy. If Prisoner 1 were to change
his strategy and instead keep quiet, then he would receive a longer jail sentence than he would if
he confessed, and Prisoner 2 will be able to walk away without punishment. Prisoner 2 should
maintain his strategy as well by the same logic. Although the best strategy for the group as a
whole would be for both to keep quiet, individually the prisoners are better off confessing since
they have no way of knowing the other prisoner’s strategy beforehand, and staying quiet while the
other confesses would result in 10 years of jail time.
The Nash equilibrium can be applied to a variety of real-life situations. It explains, for example,
why we overfish the seas: Although overfishing is clearly bad for the ecosystem as a whole, it
would be bad for an individual company to stop fishing because then that company would stop
profiting while other companies continue to fish and, hence, continue to make a profit. The Nash
equilibrium can also be applied in economics, war, politics, and countless other fields.

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R ESOURCES
Brams, Steven J., and Morton D. Davis. “Game Theory.” Encyclopædia Britannica, Encyclopædia
Britannica, 2 Nov. 2017, www.britannica.com/science/game-theory.
Chandrasekaran, R. Cooperative Game Theory. www.utdallas.edu/ chandra/documents/6311/
coopgames.pdf.
Ferguson, Thomas S. Game Theory. www.math.ucla.edu/∼tom/Game Theory/intro.pdf.
“Game Theory.” Wolfram MathWorld, Wolfram Research, mathworld.wolfram.com/GameTheory
.html.
Nasser, Gamal Abdel. Nash Equilibrium. www.columbia.edu/ rs328/NashEquilibrium.pdf.
Prisner, Erich. Game Theory: through Examples. Mathematical Association of America, Inc.,
2014.