DEFINITION of 'Matching Pennies'
A basic game theory example that demonstrates how rational decisionmakers 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 zerosum 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.
BREAKING DOWN '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 

AllPay Auction
An economic and game theory concept in which participants place ... 
Decision Theory
An interdisciplinary approach to determine how decisions are ... 
Shapley Value
In game theory, a manner of fairly distributing both gains and ... 
Trembling Hand Perfect Equilibrium
In game theory, an equilibrium state that takes into consideration ... 
Tit For Tat
A gametheory mechanism which is subject to a payoff matrix similar ... 
Diner's Dilemma
A gametheory situation with several players. Similar to a prisoner's ...

Economics
Economics Basics
Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more! 
Economics
Macroeconomics
Find out everything you need to know about macroeconomics. 
Economics
Adam Smith: The Father Of Economics
This free thinker promoted free trade at a time when governments controlled most commercial interests. 
Professionals
A Day In The Life Of An Economist
We've interviewed three economists with very different job descriptions to give you an idea of the many possibilities this career choice offers. 
Options & Futures
Nobel Winners Are Economic Prizes
Before you try to profit from their theories, you should learn about the creators themselves. 
Personal Finance
The Economics Of A Successful Marriage
These theories can keep multimillion dollar corporations afloat, so they should be able to increase the odds of wedded bliss. 
Personal Finance
Microeconomics
This tutorial teaches the basics of one of the most important economic topics. A must for all investors. 
Options & Futures
Game Theory: Beyond The Basics
Take your game theory knowledge to the next level by learning about simultaneous games and the Nash Equilibrium. 
Fundamental Analysis
The Basics Of Game Theory
Break down and examine the potential consequences of economic/financial scenarios. 
Investing
What a Family Tradition Taught Me About Investing
We share some lessons from friends and family on saving money and planning for retirement.

Why is Game Theory useful in business?
Game theory was once hailed as a revolutionary interdisciplinary phenomenon bringing together psychology, mathematics, philosophy ... Read Full Answer >> 
How do mutual funds split?
Mutual funds split in the same way that individual stocks split, but less often. Like a stock split, mutual fund splits do ... Read Full Answer >> 
What is the utility function and how is it calculated?
In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >> 
How can I use a regression to see the correlation between prices and interest rates?
In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >> 
How do I calculate a modified duration using Matlab?
The modified duration gauges the sensitivity of the fixed income securities to changes in interest rates. To calculate the ... Read Full Answer >> 
How do I calculate the rule of 72 using Matlab?
In finance, the rule of 72 is a useful shortcut to assess how long it takes an investment to double given its annual growth ... Read Full Answer >>