Matching Pennies

Dictionary Says

Definition of 'Matching Pennies'


A basic game theory example that demonstrates how rational decision-makers seek to maximize their payoffs. “Matching Pennies” involves two players simultaneously placing a penny on the table, with the payoff depending on whether the pennies match. If both pennies are heads or tails, the first player wins and keeps the other’s penny; if they do not match, the second player wins and keeps the other’s penny. Matching Pennies is a zero-sum game in that one player’s gain is the other’s loss. Since each player has an equal probability of choosing heads or tails and does so at random, there is no “Nash Equilibrium” in this situation; in other words, neither player has an incentive to try a different strategy.

Investopedia Says

Investopedia explains 'Matching Pennies'


Matching Pennies is conceptually similar to the popular “Rock, Paper, Scissors,” as well as the “odds and evens” game where two players concurrently show one or two fingers and the winner is determined by whether the fingers match.

Consider the following example to demonstrate the Matching Pennies concept. Adam and Bob are the two players in this case, and the table below shows their payoff matrix. Of the four sets of numerals shown in the cells marked (a) through (d), the first numeral represents Adam’s payoff, while the second entry represents Bob’s payoff. +1 means that the player wins a penny, while -1 means that the player loses a penny.

If Adam and Bob both play “Heads,” the payoff is as shown in cell (a) – Adam gets Bob’s penny. If Adam plays “Heads” and Bob plays “Tails,” then the payoff is reversed; as shown in cell (b), it would now be -1, +1, which means that Adam loses a penny and Bob gains a penny. Likewise, if Adam plays “Tails” and Bob plays “Heads,” the payoff as shown in cell (c) is -1, +1, and if both play “Tails” the payoff as shown in cell (d) is +1, -1.

Adam  /   Bob

Heads

Tails

Heads

(a) +1, -1

(b) -1, +1

Tails

(c) -1, +1

(d) +1, -1

 

comments powered by Disqus
Hot Definitions
  1. Valuation

    The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.
  2. Valuation

    The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.
  3. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
  4. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
  5. Momentum Investing

    An investment strategy that aims to capitalize on the continuance of existing trends in the market. The momentum investor believes that large increases in the price of a security will be followed by additional gains and vice versa for declining values.
  6. Momentum Investing

    An investment strategy that aims to capitalize on the continuance of existing trends in the market. The momentum investor believes that large increases in the price of a security will be followed by additional gains and vice versa for declining values.
Trading Center