Game theory is about a study of how and why people make decisions. Game theory helps people to understand parts of science and politics. The game theory used in several disciplines, it most significantly used as a tool that studies the economy. In-game theory, an economy application can be an important tool to use in the fundamental analysis of industries, sectors and some strategic interaction between two or more firms. Game theory is not only about the game but also how and why a business makes decisions.
Who invented the game theory?
In 1913 the first theorem of game theory was provided by E. Zermelo. In 1928 the Minimax theorem was proved by John Von. In 1944 “The theory of game Economic behavior” was written by John Von Neumann & Oskar Morgenstern. In 1950 – 1953 Nash equilibrium was described by John Nash.
Game theory gives solutions to a conflicting situation of business and military operations. This useful technique of operation research brings a basis for determining under specified conditions, the specific scenario that will result in maximum benefits and maximum loss. In such a way game theory may be illustrated as a body of knowledge that negotiates with the decision making of two or more rational opponents in the condition of problem and completion.
what are the definitions for Game theory?
Game is any situation that has a result dependent on the actions of two or more decision-makers and strategies of the other player.
Players are the participants in the game.
The strategy is the choices that players make.
- Payoff in-game
Payoff means benefits/ Outcome that gives to the player that depends on the player’s strategy and other player’s strategies.
- The information set
The information available at a given period. It usually applies when the game has a sequential component.
Equilibrium is the point where both players who in a game have made their decisions and reach an outcome.
What are the assumptions of game theory?
- The number of players in a game is infinite
- All players in the game act rationally and intelligence
- Each and every player has a certain course of action
- In a game, there is a conflict of interest between the player
- Each player must know the rules of the game
- In-game theory, it’s an assumption of maximization/ player tries to maximize his or her own payoff and Player doesn’t know about another player’s decision/ In-game theory players have to make individual decisions without direct communication.
what is the Prisoner’s Dilemma in game theory?
There is a classic example of game theory “The Prisoner’s Dilemma”, it’s about two prisoners are being questioned over guilty or not guilty of a crime. They have a choice; they can confess the crime and accept the aftermath or disavow all involvement and look forward that their partner does likewise. Confessor keep quiet? Basic game theory involves this. The payoff means outcomes received by the player. According to this scenario it’s measured in terms of the year in prison arising from their choices. Suspects are not allowed to communicate with each other. Each must take an independent decision but clearly, suspects will take into account the likely behavior of the other when under investigation. It expresses the importance of uncertainty in an oligopoly. In-game theory, Nash Equilibrium is a valuable idea. Nash equilibrium describes any situation where all players in a game are doing their best possible strategy given the strategies of all other players. In Nash equilibrium, one player (Player-A) takes the best possible actions given actions of the other player (Player-B). Likewise, the other player (Player-B) takes the best possible action given action of player-A. Two prisoners can’t communicate and they are held in a separate room. They can confess or deny. They are both suspected of the crime. Payoff shows in the matrix, according to their chosen number of years that they have to spend in prison will be decided.
If you guess product A was accepted when product A was really accepted you can get $10 if you guess when a company accept product A actually when product A was rejected you will lose $2. If you guess product A was rejected when it actually accepted you will lose $ 8 and product A is rejected and when you guess it correctly you can save $ 14 but there is no way to know Product A is accepted or rejected if you guess product B was accepted when really it happens you can get $10 if you guess when a company rejects product B when it was accepted you will lose $2. If you guess Product B was accepted when it was rejected you will lose $8 when you guess product B was rejected when it really happens you can save $14, which guesses earn you the most money. All these outcomes help to develop the best guessing strategies.
Furthermore, game theory in Business Applications helps to make acceptable alternatives to some situations and analyze situations more logically in business. It needs Artificial Intelligence. All intelligent beings that relate business make decisions all the time. Game theory can be used to decide the best course in conflicting situations in business. When it comes to business decisions it has broad possibilities. Mathematical accuracy can be considered with the help of computers. Game theory provides a systematic quantitative approach to decide the best strategy in business. A framework for competitor’s reactions to the firm actions in the business is provided. It uses to handle the situation of the independence of business firms. Game theory is looking like management devices that help rational decision making in business firms. Game theory is useful to model the behavior of competing or cooperative agents in business firms. Game theory helps to see a business situation for many periods from two perspectives; it’s about you and your competitor’s when we consider about a business we try to get optimal solutions by using game theory when it comes to competitors’ the perspective must consider how to survive in the business field because the modern business world is a very competitive one as a result of that business must focus on win and retain customers. In the real-world competitive situations occur, in telecommunications, aircraft, even Microsoft has study game theory. Researchers of Microsoft have been studying the way hundreds of people strategic games, by using Facebook, global laboratory the result they gathered give those insights into game theory. Game theory model a wide list of economic solutions, for instance, Auctions, bargaining, Oligopolies, and Industrial organizations. As a result of that game, a theory is very important to modern and existing businesses.