1. Terminal Games Theoretical Subtitle

2. A Simple Game 1: A>B>C 2: B>C>A 3: C>A>C

3. Backwards Induction 1: A>B>C 2: B>C>A 3: C>A>C

4. Backwards Induction 1: A>B>C 2: B>C>A 3: C>A>C

5. Backwards Induction 1: A>B>C 2: B>C>A 3: C>A>C

6. This doesn’t work so well if we have a cycle. 2 1 21 3

7. Cyclical Game

8. 3’s Turn: 3 prefers a4

9. 7’s Turn: 7 prefers a1

10. And so on… After 14 moves we return to our original state.

11. However, an equilibrium does exist.

12. General Idea By choosing the optimum shortest path through a strongly connected component and directing all other nodes inwards we can extend backwards induction through the cycles.

13. The ‘Optimum Path’ The Optimum Path is such that the player controlling final node in the cycle chooses its preferred destination. This player has no incentive to alter the path – maintaining Nash Equilibrium. We will use limited backwards induction to find the Optimum Path.

14. The ‘Shortest Path’ The Shortest Path ensures that no player controls enough nodes to change the route through the component. Any change by a member of the path will loop back to the path, creating a cycle. No player on the path will change, resulting in Nash Equilibrium.

15. Hopefully the two projects are connected. Have a good day. ?