Game-theoretic probability and finance come of age Glenn Shafer and Vladimir Vovk’s Probability and Finance, published in 2001, showed that perfect-information games can be used to define mathematical probability. Based on fifteen years of further research, Game-Theoretic Foundations for Probability and Finance presents a mature view of the foundational role game theory can play. Its account of probability theory opens the way to new methods of prediction and testing and makes many statistical methods more transparent and widely usable. Its contributions to finance theory include purely game-theoretic accounts of Ito’s stochastic calculus, the capital asset pricing model, the equity premium, and portfolio theory. Game-Theoretic Foundations for Probability and Finance is a book of research. It is also a teaching resource. Each chapter is supplemented with carefully designed exercises and notes relating the new theory to its historical context. Praise from early readers “Ever since Kolmogorov's Grundbegriffe, the standard mathematical treatment of probability theory has been measure-theoretic. In this ground-breaking work, Shafer and Vovk give a game-theoretic foundation instead. While being just as rigorous, the game-theoretic approach allows for vast and useful generalizations of classical measure-theoretic results, while also giving rise to new, radical ideas for prediction, statistics and mathematical finance without stochastic assumptions. The authors set out their theory in great detail, resulting in what is definitely one of the most important books on the foundations of probability to have appeared in the last few decades.” – Peter Grünwald, CWI and University of Leiden “Shafer and Vovk have thoroughly re-written their 2001 book on the game-theoretic foundations for probability and for finance. They have included an account of the tremendous growth that has occurred since, in the game-theoretic and pathwise approaches to stochastic analysis and in their applications to continuous-time finance. This new book will undoubtedly spur a better understanding of the foundations of these very important fields, and we should all be grateful to its authors.” – Ioannis Karatzas, Columbia University
Provides a foundation for probability based on game theory rather than measure theory. A strong philosophical approach with practical applications. Presents in-depth coverage of classical probability theory as well as new theory.
Game-theoretic probability and finance come of age Glenn Shafer and Vladimir Vovk’s Probability and Finance, published in 2001, showed that perfect-information games can be used to define mathematical probability. Based on fifteen years of further research, Game-Theoretic Foundations for Probability and Finance presents a mature view of the foundational role game theory can play. Its account of probability theory opens the way to new methods of prediction and testing and makes many statistical methods more transparent and widely usable. Its contributions to finance theory include purely game-theoretic accounts of Ito’s stochastic calculus, the capital asset pricing model, the equity premium, and portfolio theory. Game-Theoretic Foundations for Probability and Finance is a book of research. It is also a teaching resource. Each chapter is supplemented with carefully designed exercises and notes relating the new theory to its historical context. Praise from early readers “Ever since Kolmogorov's Grundbegriffe, the standard mathematical treatment of probability theory has been measure-theoretic. In this ground-breaking work, Shafer and Vovk give a game-theoretic foundation instead. While being just as rigorous, the game-theoretic approach allows for vast and useful generalizations of classical measure-theoretic results, while also giving rise to new, radical ideas for prediction, statistics and mathematical finance without stochastic assumptions. The authors set out their theory in great detail, resulting in what is definitely one of the most important books on the foundations of probability to have appeared in the last few decades.” – Peter Grünwald, CWI and University of Leiden “Shafer and Vovk have thoroughly re-written their 2001 book on the game-theoretic foundations for probability and for finance. They have included an account of the tremendous growth that has occurred since, in the game-theoretic and pathwise approaches to stochastic analysis and in their applications to continuous-time finance. This new book will undoubtedly spur a better understanding of the foundations of these very important fields, and we should all be grateful to its authors.” – Ioannis Karatzas, Columbia University
Evaluating statistical procedures through decision and game theory, as first proposed by Neyman and Pearson and extended by Wald, is the goal of this problem-oriented text in mathematical statistics. First-year graduate students in statistics and other students with a background in statistical theory and advanced calculus will find a rigorous, thorough presentation of statistical decision theory treated as a special case of game theory. The work of Borel, von Neumann, and Morgenstern in game theory, of prime importance to decision theory, is covered in its relevant aspects: reduction of games to normal forms, the minimax theorem, and the utility theorem. With this introduction, Blackwell and Professor Girshick look at: Values and Optimal Strategies in Games; General Structure of Statistical Games; Utility and Principles of Choice; Classes of Optimal Strategies; Fixed Sample-Size Games with Finite Ω and with Finite A; Sufficient Statistics and the Invariance Principle; Sequential Games; Bayes and Minimax Sequential Procedures; Estimation; and Comparison of Experiments. A few topics not directly applicable to statistics, such as perfect information theory, are also discussed. Prerequisites for full understanding of the procedures in this book include knowledge of elementary analysis, and some familiarity with matrices, determinants, and linear dependence. For purposes of formal development, only discrete distributions are used, though continuous distributions are employed as illustrations. The number and variety of problems presented will be welcomed by all students, computer experts, and others using statistics and game theory. This comprehensive and sophisticated introduction remains one of the strongest and most useful approaches to a field which today touches areas as diverse as gambling and particle physics.
The use of the Black-Scholes model and formula is pervasive in financial markets. There are very few undergraduate textbooks available on the subject and, until now, almost none written by mathematicians. Based on a course given by the author, the goal of
INTRODUCES THE FUNDAMENTALS OF PROBABILITY, STATISTICS, DECISION THEORY, AND GAME THEORY, AND FEATURES INTERESTING EXAMPLES OF GAMES OF CHANCE AND STRATEGY TO MOTIVATE AND ILLUSTRATE ABSTRACT MATHEMATICAL CONCEPTS Covering both random and strategic games, Probability, Decisions and Games features a variety of gaming and gambling examples to build a better understanding of basic concepts of probability, statistics, decision theory, and game theory. The authors present fundamental concepts such as random variables, rational choice theory, mathematical expectation and variance, fair games, combinatorial calculus, conditional probability, Bayes Theorem, Bernoulli trials, zero-sum games and Nash equilibria, as well as their application in games such as Roulette, Craps, Lotto, Blackjack, Poker, Rock-Paper-Scissors, the Game of Chicken and Tic-Tac-Toe. Computer simulations, implemented using the popular R computing environment, are used to provide intuition on key concepts and verify complex calculations. The book starts by introducing simple concepts that are carefully motivated by the same historical examples that drove their original development of the field of probability, and then applies those concepts to popular contemporary games. The first two chapters of Probability, Decisions and Games: A Gentle Introduction using R feature an introductory discussion of probability and rational choice theory in finite and discrete spaces that builds upon the simple games discussed in the famous correspondence between Blaise Pascal and Pierre de Fermat. Subsequent chapters utilize popular casino games such as Roulette and Blackjack to expand on these concepts illustrate modern applications of these methodologies. Finally, the book concludes with discussions on game theory using a number of strategic games. This book: · Features introductory coverage of probability, statistics, decision theory and game theory, and has been class-tested at University of California, Santa Cruz for the past six years · Illustrates basic concepts in probability through interesting and fun examples using a number of popular casino games: roulette, lotto, craps, blackjack, and poker · Introduces key ideas in game theory using classic games such as Rock-Paper-Scissors, Chess, and Tic-Tac-Toe. · Features computer simulations using R throughout in order to illustrate complex concepts and help readers verify complex calculations · Contains exercises and approaches games and gambling at a level that is accessible for readers with minimal experience · Adopts a unique approach by motivating complex concepts using first simple games and then moving on to more complex, well-known games that illustrate how these concepts work together Probability, Decisions and Games: A Gentle Introduction using R is a unique and helpful textbook for undergraduate courses on statistical reasoning, introduction to probability, statistical literacy, and quantitative reasoning for students from a variety of disciplines. ABEL RODRÍGUEZ, PhD, is Professor in the Department of Applied Mathematics and Statistics at the University of California, Santa Cruz (UCSC), CA, USA. The author of 40 journal articles, his research interests include Bayesian nonparametric methods, machine learning, spatial temporal models, network models, and extreme value theory. BRUNO MENDES, PhD, is Lecturer in the Department of Applied Mathematics and Statistics at the University of California, Santa Cruz, CA, USA. BRUNO MENDES, PhD, is Lecturer in the Department of Applied Mathematics and Statistics at the University of California, Santa Cruz, CA, USA.INTRODUCES THE FUNDAMENTALS OF PROBABILITY, STATISTICS, DECISION THEORY, AND GAME THEORY, AND FEATURES INTERESTING EXAMPLES OF GAMES OF CHANCE AND STRATEGY TO MOTIVATE AND ILLUSTRATE ABSTRACT MATHEMATICAL CONCEPTS Covering both random and strategic games, Probability, Decisions and Games features a variety of gaming and gambling examples to build a better understanding of basic concepts of probability, statistics, decision theory, and game theory. The authors present fundamental concepts such as random variables, rational choice theory, mathematical expectation and variance, fair games, combinatorial calculus, conditional probability, Bayes Theorem, Bernoulli trials, zero-sum games and Nash equilibria, as well as their application in games such as Roulette, Craps, Lotto, Blackjack, Poker, Rock-Paper-Scissors, the Game of Chicken and Tic-Tac-Toe. Computer simulations, implemented using the popular R computing environment, are used to provide intuition on key concepts and verify complex calculations. The book starts by introducing simple concepts that are carefully motivated by the same historical examples that drove their original development of the field of probability, and then applies those concepts to popular contemporary games. The first two chapters of Probability, Decisions and Games: A Gentle Introduction using R feature an introductory discussion of probability and rational choice theory in finite and discrete spaces that builds upon the simple games discussed in the famous correspondence between Blaise Pascal and Pierre de Fermat. Subsequent chapters utilize popular casino games such as Roulette and Blackjack to expand on these concepts illustrate modern applications of these methodologies. Finally, the book concludes with discussions on game theory using a number of strategic games. This book: • Features introductory coverage of probability, statistics, decision theory and game theory, and has been class-tested at University of California, Santa Cruz for the past six years • Illustrates basic concepts in probability through interesting and fun examples using a number of popular casino games: roulette, lotto, craps, blackjack, and poker • Introduces key ideas in game theory using classic games such as Rock-Paper-Scissors, Chess, and Tic-Tac-Toe. • Features computer simulations using R throughout in order to illustrate complex concepts and help readers verify complex calculations • Contains exercises and approaches games and gambling at a level that is accessible for readers with minimal experience • Adopts a unique approach by motivating complex concepts using first simple games and then moving on to more complex, well-known games that illustrate how these concepts work together Probability, Decisions and Games: A Gentle Introduction using R is a unique and helpful textbook for undergraduate courses on statistical reasoning, introduction to probability, statistical literacy, and quantitative reasoning for students from a variety of disciplines. ABEL RODRÍGUEZ, PhD, is Professor in the Department of Applied Mathematics and Statistics at the University of California, Santa Cruz (UCSC), CA, USA. The author of 40 journal articles, his research interests include Bayesian nonparametric methods, machine learning, spatial temporal models, network models, and extreme value theory. BRUNO MENDES, PhD, is Lecturer in the Department of Applied Mathematics and Statistics at the University of California, Santa Cruz, CA, USA.
Drawing upon and extending his inaugural Lipsey Lectures, Debraj Ray looks at coalition formation from the perspective of game theory. Ray brings together developments in both cooperative and noncooperative game theory to study the analytics of coalition formation and binding agreements.
This book provides a basic grounding in the use of probability to model random financial phenomena of uncertainty, and is targeted at an advanced undergraduate and graduate level. It should appeal to finance students looking for a firm theoretical guide to the deep end of derivatives and investments. Bankers and finance professionals in the fields of investments, derivatives, and risk management should also find the book useful in bringing probability and finance together. The book contains applications of both discrete time theory and continuous time mathematics, and is extensive in scope. Distribution theory, conditional probability, and conditional expectation are covered comprehensively, and applications to modeling state space securities under market equilibrium are made. Martingale is studied, leading to consideration of equivalent martingale measures, fundamental theorems of asset pricing, change of numeraire and discounting, risk-adjusted and forward-neutral measures, minimal and maximal prices of contingent claims, Markovian models, and the existence of martingale measures preserving the Markov property. Discrete stochastic calculus and multiperiod models leading to no-arbitrage pricing of contingent claims are also to be found in this book, as well as the theory of Markov Chains and appropriate applications in credit modeling. Measure-theoretic probability, moments, characteristic functions, inequalities, and central limit theorems are examined. The theory of risk aversion and utility, and ideas of risk premia are considered. Other application topics include optimal consumption and investment problems and interest rate theory.
A new paradigm for balancing flexibility and commitment in management strategy through the amalgamation of real options and game theory. Corporate managers who face both strategic uncertainty and market uncertainty confront a classic trade-off between commitment and flexibility. They can stake a claim by making a large capital investment today, influencing their rivals' behavior, or they can take a “wait and see” approach to avoid adverse market consequences tomorrow. In Competitive Strategy, Benoît Chevalier-Roignant and Lenos Trigeorgis describe an emerging paradigm that can quantify and balance commitment and flexibility, “option games,” by which the decision-making approaches of real options and game theory can be combined. The authors first discuss prerequisite concepts and tools from basic game theory, industrial organization, and real options analysis, and then present the new approach in discrete time and later in continuous time. Their presentation of continuous-time option games is the first systematic coverage of the topic and fills a significant gap in the existing literature. Competitive Strategy provides a rigorous yet pragmatic and intuitive approach to strategy formulation. It synthesizes research in the areas of strategy, economics, and finance in a way that is accessible to readers not necessarily expert in the various fields involved.
We live in a highly connected world with multiple self-interested agents interacting and myriad opportunities for conflict and cooperation. The goal of game theory is to understand these opportunities. This book presents a rigorous introduction to the mathematics of game theory without losing sight of the joy of the subject. This is done by focusing on theoretical highlights (e.g., at least six Nobel Prize winning results are developed from scratch) and by presenting exciting connections of game theory to other fields such as computer science (algorithmic game theory), economics (auctions and matching markets), social choice (voting theory), biology (signaling and evolutionary stability), and learning theory. Both classical topics, such as zero-sum games, and modern topics, such as sponsored search auctions, are covered. Along the way, beautiful mathematical tools used in game theory are introduced, including convexity, fixed-point theorems, and probabilistic arguments. The book is appropriate for a first course in game theory at either the undergraduate or graduate level, whether in mathematics, economics, computer science, or statistics. The importance of game-theoretic thinking transcends the academic setting—for every action we take, we must consider not only its direct effects, but also how it influences the incentives of others.
