of Elements Game Theory Basic Game Theory Terms. Game: Description of the situation, includes the rules of the game; Players: decision makers in the game; Payos: expected rewards enjoyed at the end of the game Actions: possible choices made by the player Strategies: specied plan of action for every contingency played by other players Basic assumptions. 1. Rationality: everyone maximizes payos 2. Common knowledge of rationality: everyone understands that everyone is rational 3. No outside communication: players communicate only through actions. 4. Full knowledge of the game: payos and actions are observable and known by all. Types of games. Game are simultaneous or sequential. Simultaneous games - Games with nite # of actions represented in normal form (table listing actions and payos) - Actions and strategies are the same. - Equilibrium concept: NASH Equilibrium A set of actions where every players the selects action that maximizes his payos given that other players also do the same. - How to nd NASH equilibrium? By looking for mutual best response. Sequential games. - Games with nite # of actions represented in extensive form (decision tree). - Some agents have only actions, some have strategies. - Game also represented in normal form where the table lists strategies and payos. - Equilibrium concept: Nash Equilibrium applied to strategies (instead of only actions) give often multiple equilibria (by looking for Nash in the norm...