Game Theory Definitions
Any time we have a situation with two or more players that involves known payouts or quantifiable consequences, we can use game theory to help determine the most likely outcomes. Let's start out by defining 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
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