Here are a few terms commonly used in the study of game theory:
Game: Any set of circumstances that has a result dependent on the actions of two or more decision-makers (players).
Players: A strategic decision-maker within the context of the game.
Strategy: A complete plan of action a player will take given the set of circumstances that might arise within the game.
Payoff: The payout a player receives from arriving at a particular outcome. The payout can be in any quantifiable form, from dollars to utility.
Information set: The information available at a given point in the game. The term "information set" is most usually applied when the game has a sequential component.
Equilibrium: The point in a game where both players have made their decisions and an outcome is reached.
TYPES OF GAMES
Although there are many types of game theory, such as symmetric/asymmetric, simultaneous/sequential, and so on, cooperative and non-cooperative game theories are the most common.Â
Cooperative game theory deals with how coalitions, or cooperative groups, interact when only the payoffs are known. It is a game between coalitions of players rather than between individuals, and it questions how groups form and how they allocate the payoff amonfst players.
Non-cooperative game theory deals with how rational economic agents deal with each other to achieve their own goals. The most common non-cooperative game is the strategic game, in which only the available strategies and the outcomes that result from a combination of choices are listed. A simplistic example of a real-world non-cooperative game is rock-paper-scissors
When there is a direct conflict between multiple parties striving for the same outcome, it is often called a zero sum game. This means that for every winner, there is a loser. Alternatively, it means that the collective net benefit received is equal to the collective net benefit lost. Lots of sporting events are a zero-sum game as one team wins and another team loses.
A non-zero-sum game is one in which all participants can win or lose at the same time. Consider business partnerships that are mutually beneficial and foster value for both entities. Instead of competing and attempting to win at the expense of the other, both parties benefit.
Investing and trading stocks is sometimes considered a zero-sum game. After all, one market participant buys a stock and another participant sells that same stock for the same price. However, because different investors have different risk appetites and investing goals, it may be mutually beneficial for both parties to transact.