Matching pennies
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Matching pennies is the name for a simple example game used in game theory. It is the two strategy equivalent of Rock, Paper, Scissors. Matching pennies, also called Pesky little brother game is used primarily to illustrate the concept of mixed strategies and a mixed strategy Nash equilibrium.
The game is played between two players, Player A and Player B. Each player has a penny and must secretly turn the penny to heads or tails. The players then reveal their choices simultaneously. If the pennies match (both heads or both tails), Player A receives one dollar from Player B (+1 for A, -1 for B). If the pennies do not match (one heads and one tails), Player B receives one dollar from Player A (-1 for A, +1 for B). This is an example of a zero-sum game, where one player's gain is exactly equal to the other player's loss.
The game can be written in a payoff matrix pictured above. Each cell of the matrix shows the two players' payoffs, with Player A's payoffs listed first.
This game has no pure strategy Nash equilibrium since there is no pure strategy (heads or tails) that is a best response to a best response. Alternatively, there is no strategy set where neither player would want to switch when told what the other would do. Instead, the unique Nash equilibrium of this game is in mixed strategies: each player chooses heads or tails with equal probability. In this way, each player makes the other indifferent between choosing heads or tails, so neither player has an incentive to try another strategy.
Of course, most human players cannot or will not faithfully apply the equilibrium strategy, especially if Matching pennies is played repeatedly. In a repeated game, if one is sufficiently adept at psychology, it may be possible to predict the opponent's move and choose accordingly, in the same manner as expert Rock, Paper, Scissors players. In this way, a positive expected payoff might be attainable, whereas against an opponent who plays the equilibrium, one's expected payoff is zero.
The matching pennies game is mathematically equivalent to a game children play called "choosing" or "odds and evens," where two players simultaneously display one or two fingers, with the winner determined by whether or not the number of fingers match. The only strategy for both these games to avoid being exploited is to perfectly randomize your selection.
References
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