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Nash Equilibrium
In game theory, the Nash equilibrium is the most commonly used solution concept for non-cooperative games. A Nash equilibrium is a situation where no player could gain by changing their own strategy (holding all other players' strategies fixed). The idea of Nash equilibrium dates back to the time of Cournot, who in 1838 applied it to his model of competition in an oligopoly. If each player has chosen a strategy an action plan based on what has happened so far in the game and no one can increase one's own expected payoff by changing one's strategy while the other players keep theirs unchanged, then the current set of strategy choices constitutes a Nash equilibrium. If two players Alice and Bob choose strategies A and B, (A, B) is a Nash equilibrium if Alice has no other strategy available that does better than A at maximizing her payoff in response to Bob choosing B, and Bob has no other strategy available that does better than B at maximizing his payoff in response to Alice c ...
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Rationalizability
Rationalizability is a solution concept in game theory. It is the most permissive possible solution concept that still requires both players to be at least rational, somewhat rational and know the other players are also somewhat rational, i.e. that they do not play dominated strategies. A strategy is rationalizable if there exists some possible set of beliefs both players could have about each other's actions, that would still result in the strategy being played. Rationalizability is a broader concept than a Nash equilibrium. Both require players to respond optimally to some belief about their opponents' actions, but Nash equilibrium requires these beliefs to be correct, while rationalizability does not. Rationalizability was first defined, independently, by Bernheim (1984) and Pearce (1984). Definition Starting with a normal-form game, the rationalizable set of actions can be computed as follows: # Start with the full action set for each player. # Remove all Strategic domi ...
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Strategy (game Theory)
In game theory, a move, action, or play is any one of the options which a player can choose in a setting where the optimal outcome depends ''not only'' on their own actions ''but'' on the actions of others. The discipline mainly concerns the action of a player in a game affecting the behavior or actions of other players. Some examples of "games" include chess, bridge, poker, monopoly, diplomacy or battleship. The term strategy is typically used to mean a complete algorithm for playing a game, telling a player what to do for every possible situation. A player's strategy determines the action the player will take at any stage of the game. However, the idea of a strategy is often confused or conflated with that of a move or action, because of the correspondence between moves and pure strategies in normal-form game, most games: for any move ''X'', "always play move ''X''" is an example of a valid strategy, and as a result every move can also be considered to be a strategy. Other autho ...
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Coordination Game
A coordination game is a type of simultaneous game found in game theory. It describes the situation where a player will earn a higher payoff when they select the same course of action as another player. The game is not one of pure conflict, which results in multiple pure strategy Nash equilibrium, Nash equilibria in which players choose matching strategies. Figure 1 shows a 2-player example. Both (Up, Left) and (Down, Right) are Nash equilibria. If the players expect (Up, Left) to be played, then player 1 thinks their payoff would fall from 2 to 1 if they deviated to Down, and player 2 thinks their payoff would fall from 4 to 3 if they chose Right. If the players expect (Down, Right), player 1 thinks their payoff would fall from 2 to 1 if they deviated to Up, and player 2 thinks their payoff would fall from 4 to 3 if they chose Left. A player's optimal move depends on what they expect the other player to do, and they both do better if they coordinate than if they played an off-e ...
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Currency Crisis
A currency crisis is a type of financial crisis, and is often associated with a real economic crisis. A currency crisis raises the probability of a banking crisis or a default crisis. During a currency crisis the value of foreign denominated debt will rise drastically relative to the declining value of the home currency. Generally doubt exists as to whether a country's central bank has sufficient foreign exchange reserves to maintain the country's fixed exchange rate, if it has any. The crisis is often accompanied by a speculative attack in the foreign exchange market. A currency crisis results from chronic balance of payments deficits, and thus is also called a balance of payments crisis. Often such a crisis culminates in a devaluation of the currency. Financial institutions and the government will struggle to meet debt obligations and economic crisis may ensue. Causation also runs the other way. The probability of a currency crisis rises when a country is experiencing a banki ...
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Bank Run
A bank run or run on the bank occurs when many Client (business), clients withdraw their money from a bank, because they believe Bank failure, the bank may fail in the near future. In other words, it is when, in a fractional-reserve banking system (where banks normally only keep a small proportion of their assets as cash), numerous customers withdraw cash from deposit accounts with a financial institution at the same time because they believe that the financial institution is, or might become, insolvency, insolvent. When they transfer funds to another institution, it may be characterized as a capital flight. As a bank run progresses, it may become a self-fulfilling prophecy: as more people withdraw cash, the likelihood of default increases, triggering further withdrawals. This can destabilize the bank to the point where it runs out of cash and thus faces sudden bankruptcy. To combat a bank run, a bank may acquire more cash from other banks or from the central bank, or limit the a ...
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Technical Standard
A technical standard is an established Social norm, norm or requirement for a repeatable technical task which is applied to a common and repeated use of rules, conditions, guidelines or characteristics for products or related processes and production methods, and related management systems practices. A technical standard includes definition of terms; classification of components; delineation of procedures; specification of dimensions, materials, performance, designs, or operations; measurement of quality and quantity in describing materials, processes, products, systems, services, or practices; test methods and sampling procedures; or descriptions of fit and measurements of size or strength. It is usually a formal document that establishes uniform engineering or technical criteria, methods, processes, and practices. In contrast, a custom, convention, company product, corporate standard, and so forth that becomes generally accepted and dominant is often called a ''de facto'' standar ...
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Stag Hunt
In game theory, the stag hunt, sometimes referred to as the assurance game, trust dilemma or common interest game, describes a conflict between safety and social cooperation. The stag hunt problem originated with philosopher Jean-Jacques Rousseau in his '' Discourse on Inequality''. In the most common account of this dilemma, which is quite different from Rousseau's, two hunters must decide separately, and without the other knowing, whether to hunt a stag or a hare. However, both hunters know the only way to successfully hunt a stag is with the other's help. One hunter can catch a hare alone with less effort and less time, but it is worth far less than a stag and has much less meat. But both hunters would be better off if both choose the more ambitious and more rewarding goal of getting the stag, giving up some autonomy in exchange for the other hunter's cooperation and added might. This situation is often seen as a useful analogy for many kinds of social cooperation, such as ...
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Battle Of The Sexes (game Theory)
In game theory, the battle of the sexes is a two-player coordination game that also involves elements of conflict. The game was introduced in 1957 by R. Duncan Luce and Howard Raiffa in their classic book, ''Games and Decisions''. Some authors prefer to avoid assigning sexes to the players and instead use Players 1 and 2, and some refer to the game as Bach or Stravinsky, using two concerts as the two events.Osborne, Martin and Ariel Rubinstein (1994). ''A Course in Game Theory.'' The MIT Press. The game description here follows Luce and Raiffa's original story. Imagine that a man and a woman hope to meet this evening, but have a choice between two events to attend: a prize fight and a ballet. The man would prefer to go to prize fight. The woman would prefer the ballet. Both would prefer to go to the same event rather than different ones. If they cannot communicate, where should they go? The payoff matrix labeled "Battle of the Sexes (1)" shows the payoffs when the man cho ...
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Tit-for-tat
Tit for tat is an English saying meaning "equivalent retaliation". It is an alternation (linguistics), alternation of ''wikt:tip#Noun 3, tip for wikt:tap#Verb 2, tap'' "blow for blow", first recorded in 1558. It is also a highly effective strategy in game theory. An intelligent agent, agent using this strategy will first cooperate, then subsequently replicate an opponent's previous action. If the opponent previously was cooperative, the agent is cooperative. If not, the agent is not. This is similar to reciprocal altruism in biology. Game theory Tit-for-tat has been very successfully used as a strategy for the iterated prisoner's dilemma. The strategy was first introduced by Anatol Rapoport in Robert Axelrod (political scientist), Robert Axelrod's two tournaments, held around 1980. Notably, it was (on both occasions) both the simplest strategy and the most successful in direct competition. Few have extended the game theoretical approach to other applications such as finance. In ...
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Prisoner's Dilemma
The prisoner's dilemma is a game theory thought experiment involving two rational agents, each of whom can either cooperate for mutual benefit or betray their partner ("defect") for individual gain. The dilemma arises from the fact that while defecting is rational for each agent, cooperation yields a higher payoff for each. The puzzle was designed by Merrill Flood and Melvin Dresher in 1950 during their work at the RAND Corporation. They invited economist Armen Alchian and mathematician John Williams to play a hundred rounds of the game, observing that Alchian and Williams often chose to cooperate. When asked about the results, John_Forbes_Nash_Jr., John Nash remarked that rational behavior in the Prisoner's dilemma#The_iterated_prisoner's_dilemma, iterated version of the game can differ from that in a single-round version. This insight anticipated a Folk_theorem_(game_theory), key result in game theory: cooperation can emerge in repeated interactions, even in situations where it i ...
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Decision Making
In psychology, decision-making (also spelled decision making and decisionmaking) is regarded as the cognitive process resulting in the selection of a belief or a course of action among several possible alternative options. It could be either rational or irrational. The decision-making process is a reasoning process based on assumptions of values, preferences and beliefs of the decision-maker. Every decision-making process produces a final choice, which may or may not prompt action. Research about decision-making is also published under the label problem solving, particularly in European psychological research. Overview Decision-making can be regarded as a problem-solving activity yielding a solution deemed to be optimal, or at least satisfactory. It is therefore a process which can be more or less rational or irrational and can be based on explicit or tacit knowledge and beliefs. Tacit knowledge is often used to fill the gaps in complex decision-making processes. Usua ...
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