Game theory is very much like the theory of social situations, as explained by the psychologists. It is similar like some parlor games such as poker or bridge. But many researchers say that it is how groups interact. Game theory is the study of mathematical models of conflicts and cooperation between intelligent rational decision makers. It’s used mainly in economics, political science, psychology, logic, computer science, biology and poker.
In a strategic game theory, agents or company chooses its movements so as to get as much high response or return as possible. It’s like a game of chess where you want to defeat your opponent ‘s every move and win. It is also known as the mathematics or the art of interaction.
First in a game theory, it is made sure as who all are going to interact. Interacting is a very important part of game theory as it establishes the base of the entire game theory. Another step to game theory is to strategies the plan. In order to have a successful interaction, it’s needed to think and make a strategy and steps as to how the interaction should be done so as to get the maximum response or highest returns.
1. It is basically and simply the concept of decision making. Decisions are made for the interaction to take place for a successful attack against your opponent and making the highest loot in returns.
2. Game theory doesn’t depend on making solutions. But it’s just to make choices and strategies so as to get the best return. The players, which can be anything such as an individual, institution or organisation, make strategies and choices carefully and make contingency plans if the first strategy fails.
There are two main branches of game theory.
Cooperation is where everyone agrees to everyone. Everything runs easily and smoothly. Cooperation leads mostly towards high payoffs.
One way to describe game theory is to take some game players (or individuals) who are going to participate in a game and each player is made available a number of alternative choices.? In the case of a twoplayer game, the actions of the first player form the rows, and the actions of the second player the columns, of a matrix. The entries in the matrix are two numbers representing the utility or payoff to the first and second player respectively. A very famous game is the Prisoner's Dilemma game. In this game the two players are partners in a crime who have been captured by the police. Each suspect is placed in a separate cell, and offered the opportunity to confess to the crime. The game can be represented by the following matrix of payoffs.
The higher numbers are better (more utility). If neither suspect confesses, they go free, and split the proceeds of their crime which we represent by 5 units of utility for each suspect. However, if one prisoner confesses and the other does not, the prisoner who confesses testifies against the other in exchange for going free and gets the entire 10 units of utility, while the prisoner who did not confess goes to prison and which results in the low utility of 4. If both prisoners confess, then both are given a reduced term, but both are convicted, which we represent by giving each 1 unit of utility: better than having the other prisoner confess, but not so good as going free.
In addition to the game theory, there are three main economic theory such as decision theory, general equilibrium theory and mechanism design theory.
1. Decision theory: It can be viewed as a decision between an individual against nature. Decision theory argues that preferences among risky alternatives can be described by the maximization of the expected value of a numerical utility function, where utility may depend on a number of things, but in situations of interest to economists often depends on money income.
2. General equilibrium theory: can be viewed as a specialized branch of game theory that deals with trade and production, and typically with a relatively large number of individual consumers and producers. It is widely used in the macroeconomic analysis of broad based economic policies such as monetary or tax policy, in finance to analyze stock markets, to study interest and exchange rates and other prices.
3. Mechanism design theory: differs from game theory in that game theory takes the rules of the game as given, while mechanism design theory asks about the consequences of different types of rules. Naturally this relies heavily on game theory. Questions addressed by mechanism design theory include the design of compensation and wage agreements that effectively spread risk while maintaining incentives, and the design of auctions to maximize revenue, or achieve other goals.
Thus we see how important and crucial game theory is for the development of the individual or an institution or an organisation. These decisions should be taken very carefully and expert advice must be taken.
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