Glossary of game theory

Definitions of a game
Notational conventions
Real numbers . The set of players N. Strategy space , where Player i's strategy space is the space of all possible ways in which player i can play the game. A strategy for player i is an element of complements .

an element of

, is a tuple of strategies for all players other than i.

Outcome space is in most textbooks identical to Payoffs , describing how much gain (money, pleasure, etc.) the players are allocated by the end of the game.

Normal form game

A game in normal form is a function:

Given the tuple of strategies chosen by the players, one is given an allocation of payments (given as real numbers). A further generalization can be achieved by splitting the game into a composition of two functions:

the outcome function of the game (some authors call this function "the game form"), and:

the allocation of payoffs (or preferences) to players, for each outcome of the game.

Extensive form game

This is given by a tree, where at each vertex of the tree a different player has the choice of choosing an edge. The outcome set of an extensive form game is usually the set of tree leaves.

Cooperative game
A game in which players are allowed form coalitions (and to enforce coalitionary discipline). A cooperative game is given by stating a value for every coalition:

It is always assumed that the empty coalition gains nil. Solution concepts for cooperative games usually assume that the players are forming the grand coalition N, whose value (N) is then divided among the players to give an allocation.

Simple game
A Simple game is a simplified form of a cooperative game, where the possible gain is assumed to be either '0' or '1'. A simple game is couple (N, W), where W is the list of "winning" coalitions, capable of gaining the loot ('1'), and N is the set of players.

Glossary
Acceptable game is a game form such that for every possible preference profiles, the game has pure nash equilibria, all of which are pareto efficient. Allocation of goods is a function . The allocation is a cardinal approach for determining the good (e.g. money) the players are granted under the different outcomes of the game. Best reply the best reply to a given complement is a strategy that maximizes player i's payment. Formally, we want: . Coalition is any subset of the set of players: .

Condorcet winner Given a preference on the outcome space, an outcome a is a condorcet winner if all non-dummy players prefer a to all other outcomes. Dictator A player is a strong dictator if he can guarantee any outcome regardless of the other players. is a weak dictator if he can guarantee any outcome, but his strategies for doing so might depend on the complement strategy vector. Naturally, every strong dictator is a weak dictator. Formally: m is a Strong dictator if: m is a Weak dictator if:

Another way to put it is: a weak dictator is -effective for every possible outcome. A strong dictator is -effective for every possible outcome. A game can have no more than one strong dictator. Some games have multiple weak dictators (in rock-paper-scissors both players are weak dictators but none is a strong dictator). See Effectiveness. Antonym: dummy. Dominated outcome Given a preference on the outcome space, we say that an outcome a is dominated by outcome b (hence, b is the dominant strategy) if it is preferred by all players. If, in addition, some player strictly prefers b over a, then we say that a is strictly dominated. Formally: for domination, and for strict domination. An outcome a is (strictly) dominated if it is (strictly) dominated by some other outcome. An outcome a is dominated for a coalition S if all players in S prefer some other outcome to a. See also Condorcet winner. Dominated strategy we say that strategy is (strongly) dominated by strategy if for any complement strategies tuple , player i benefits by playing . Formally speaking: and . A strategy is (strictly) dominated if it is (strictly) dominated by some other strategy. Dummy A player i is a dummy if he has no effect on the outcome of the game. I.e. if the outcome of the game is insensitive to player i's strategy. Antonyms: say, veto, dictator.

Effectiveness A coalition (or a single player) S is effective for a if it can force a to be the outcome of the game. S is -effective if the members of S have strategies s.t. no matter what the complement of S does, the outcome will be a. S is -effective if for any strategies of the complement of S, the members of S can answer with strategies that ensure outcome a. Finite game is a game with finitely many players, each of which has a finite set of strategies. Grand coalition refers to the coalition containing all players. In cooperative games it is often assumed that the grand coalition forms and the purpose of the game is to find stable imputations. Mixed strategy for player i is a probability distribution P on . It is understood that player i chooses a strategy randomly according to P. Mixed Nash Equilibrium Same as Pure Nash Equilibrium, defined on the space of mixed strategies. Every finite game has Mixed Nash Equilibria. Pareto efficiency An outcome a of game form is (strongly) pareto efficient if it is undominated under all preference profiles. Preference profile is a function . This is the ordinal approach at describing the outcome of the game. The preference describes how 'pleased' the players are with the possible outcomes of the game. See allocation of goods. Pure Nash Equilibrium An element of the strategy space of a game is a pure nash equilibrium point if no player i can benefit by deviating from his strategy , given that the other players are playing in . Formally: . No equilibrium point is dominated. Say A player i has a Say if he is not a Dummy, i.e. if there is some tuple of complement strategies s.t. ( _i) is not a constant function. Antonym: Dummy. Value A value of a game is a rationally expected outcome. There are more than a few definitions of value, describing different methods of obtaining a solution to the game. Veto A veto denotes the ability (or right) of some player to prevent a specific alternative from being the outcome of the game. A player who has that ability is calleda veto player. Antonym: Dummy.

Weakly acceptable game is a game that has pure nash equilibria some of which are pareto efficient. Zero sum game is a game in which the allocation is constant over different outcomes. Formally:

w.l.g. we can assume that constant to be zero. In a zero sum game, one player's gain is
another player's loss. Most classical board games (e.g. chess, checkers) are zero sum.

Chai

aradox
tore paradox" i a concept t at purport to refute standard

Chai ore paradox (or "C i game t eory reasoning.

The chai store game

A monopolist (Player A) has branches in 20 towns. He faces 20 potential competitors, one in each town, who will be able to choose IN or OUT. They do so in sequential order and one at a time. If a potential competitor chooses OUT, he recei es a payoff of 1, while A recei es a payoff of 5. If he chooses IN, he will recei e a payoff of either 2 or 0, depending on the response of Player A to his action. Player A, in response to a choice of IN, must choose one of two pricing strategies, COOPERATIVE or AGGRESSIVE. If he chooses COOPERATIVE, both player A and the competitor recei e a payoff of 2, and if A chooses Aggressi e, each player recei es a payoff of 0. These outcomes lead to two theories for the game, the induction (game theoretically correct version) and the deterrence theory (weakly dominated theory):

Induction theory
Consider the decision to be made by the 20th and final competitor, of whether to choose IN or OUT. He knows that if he chooses IN, Player A receives a higher payoff from choosing cooperate than aggressive, and being the last period of the game, there are no longer any future competitors whom Player A needs to intimidate from the market. Knowing this, the 20th competitor enters the market, and Player A will cooperate (receiving a payoff of 2 instead of 0). The outcome in the final period is set in stone, so to speak. Now consider period 19, and the potential competitor's decision. He knows that A will cooperate in the next period, regardless of what happens in period 19. Thus, if player 19 enters, an aggressive strategy will be unable to deter player 20 from entering. Player 19 knows this and chooses IN. Player A chooses cooperate. Of course, this process of backwards induction holds all the way back to the first competitor. Each potential competitor chooses IN, and Player A always cooperates. A receives a payoff of 40 (2*20) and each competitor receives 2.

Deterrence theory
Player A can get more than 40. Suppose Player A finds the induction argument convincing. He will decide how many periods at the end to play such a strategy, suppose 3. Then in periods 1-17, he will decide to always be aggressive against the choice of IN. If all of the potential competitors know this, it is unlikely potential competitors 1-17 will bother the chain store, and risk a safe payout of 1, to get an assured 0. If a few do test the chain store early in the game, and see that they are greeted with the aggressive strategy, the rest of the competitors are likely not to test any further. Assuming all 17 are deterred, Player A receives

91 (17*5 + 2*3). Even if 10 competitors test Player A's will, he still receives 41 (7*5 +2*3) which is better than the induction (game theoretically correct) payoff.

The chain store paradox

The logical inescapability of the induction argument is unable to destroy the allure of the deterrence theory, and deterrence is what most players and economists versed in game theory will play if they play this game. Reinhard Selten's response to this paradox is to argue that the idea of "deterrence", while irrational by the standards of Game Theory, is in fact an acceptable idea by the rationality that individuals actually employ. Selten argues that individuals can make decisions of three levels: Routine, Imagination, and Reasoning.

Selten's levels of decision making

The routine level
The individuals use their past experience of the results of decisions to guide their response to choices in the present. "The underlying criteria of similarity between decision situations are crude and sometimes inadequate". (Selten)

The imagination level

The individual tries to visualise how the selection of different alternatives may influence the probable course of future events. This level employs the routine level within the procedural decisions. This method is similar to a computer simulation.

The reasoning level

The individual makes a conscious effort to analyse the situation in a rational way, using both past experience and logical thinking. This mode of decision uses simplified models whose assumptions are products of imagination, and is the only method of reasoning permitted and expected by game theory.

Decision making process

The predecision
One chooses which method (routine, imagination or reasoning) to use for the problem, and this decision itself is made on the routine level.

The final decision

Depending on which level is selected, the individual begins the decision procedure. The individual then arrives at a (possibly different) decision for each level available (if we have chosen imagination, we would arrive at a routine decision and possible and imagination decision). Selten argues that individuals can always reach a routine decision, but perhaps not

the higher levels. Once the individuals have all their levels of decision, they can decide which answer to use...the Final Decision. The final decision is made on the routine level and governs actual behaviour.

The economy of decision effort

Decision effort is a scarce commodity, being both time consuming and mentally taxing. Reasoning is more costly than Imagination which, in turn is more costly than Routine. The highest level activated is not always the most accurate since the individual may be able to reach a good decision on the routine level, but makes seriously computational mistakes on higher levels, especially Reasoning. Selten finally argues that strategic decisions, like those made by the monopolist in the chainstore paradox, are generally made by on the level of Imagination, where deterrence is a reality, due to the complexity of Reasoning, and the great inferiority of Routine (it does not allow the individual to see herself in the other player's position). Since Imagination cannot be used to visualise more than a few stages of an extensive form game (like the Chain-store game) individuals break down games into "the beginning" and "towards the end". Here, deterrence is a reality, since it is reasonable "in the beginning", yet is not convincing "towards the end".