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UNDERSTANDING GAME THEORY



  May 23, 2024

UNDERSTANDING GAME THEORY



Game Theory is a branch of mathematics that studies how individuals or groups make decisions in situations where the outcome depends not only on their actions but also on the actions of others. It helps in understanding strategic interactions where each participant’s success in making choices depends on the choices of others.

Basic Concepts of Game Theory

1. Players: The decision-makers in the game.
2. Strategies: The possible actions each player can take.
3. Payoffs: The outcomes resulting from the combination of strategies chosen by the players.
4. Equilibrium: A situation where no player can benefit by changing their strategy while the other players keep their strategies unchanged.

Simple Explanation with Indian Examples

► Example 1: The Street Vendor Dilemma

Imagine two street vendors in an Indian market selling the same type of chaat (street food). Both want to attract more customers to maximize their profits. They have two strategies:

1. Vendor 1: Can either lower the price or keep it the same.
2. Vendor 2: Can also either lower the price or keep it the same.

Outcomes:

If both vendors keep the same price, they share the customers equally.
If one lowers the price while the other keeps it the same, the one who lowers the price gets more customers.
If both lower their prices, they again share the customers, but their profit margins are reduced.

► Example 2: The Festival Stall Allocation

During Diwali, two shopkeepers want to set up their stalls at a busy intersection in a town. They have to decide whether to set up their stall early in the morning or later in the day.

Strategies:

1. Shopkeeper 1: Can set up early or late.
2. Shopkeeper 2: Can also set up early or late.

Outcomes:

• If both set up early, they split the morning customers.
• If one sets up early and the other late, they both enjoy peak hours alone, getting more customers.
• If both set up late, they split the evening customers.

► Example 3: The Indian Family Dinner

Imagine a scenario where an Indian family decides on a dinner menu. There are two family members who prefer different dishes.

1. Member 1: Prefers Paneer Butter Masala.
2. Member 2: Prefers Chicken Curry.

Strategies:

Both can either insist on their preferred dish or compromise.

Outcomes:

If both insist on their preferred dish, there might be a conflict.
If one insists and the other compromises, the one who insists gets their preferred dish.
If both compromise, they might choose a third dish that is acceptable to both, like Mixed Vegetable Curry.

Nash Equilibrium in Indian Context

A Nash Equilibrium occurs when each player’s strategy is optimal, given the strategy of the other player(s). In the Indian family dinner example, if both family members decide to compromise and agree on Mixed Vegetable Curry, they reach a Nash Equilibrium. Neither family member can improve their satisfaction by changing their choice alone.

Conclusion

Game Theory helps in analyzing strategic situations in various aspects of life, from business decisions to everyday interactions. By understanding the possible outcomes and strategies of others, individuals and groups can make better decisions that lead to more favorable results.



SRIRAM’s


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