## DEFINITION of 'Matching Pennies'

Matching Pennies is 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.

Next Up

## 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
RELATED TERMS
1. ### Penny Stock

A Penny Stock is an equity security that trades below \$5. Penny ...
2. ### Payoff Statement

A payoff statement is a statement prepared by a lender providing ...
3. ### Penny Stock Reform Act

A securities act enacted in 1990 that sought to clamp down on ...
4. ### Centipede Game

The centipede game in game theory involves two players alternately ...
5. ### Currency Binary Option

A currency binary option is a way to make very short-term bets ...
6. ### Paradox of Rationality

The paradox of rationality is the empirical observation that ...
Related Articles
1. Investing

### Understanding Penny Stocks' Risks and Rewards

Penny stocks can soar in a short period, but dabbling in them is a dangerous game. Here is a breakdown on the risks and rewards of penny stocks.
2. Investing

### Looking to Begin Trading in The Stock Market?

If you are a new trader, we explain the differences between penny stocks and options so you can make the best decision for your personal trade plan.
3. Investing

### Why Do Penny Stocks Fail?

Penny stocks are speculative and highly risky investments. Lack of government and stock exchange oversight and general information leaves penny stock investors open to sudden losses.
4. Trading

### Penny Stocks Vs. Forex: Which Is Right for You?

Learn more about penny stock trading and forex market trading, and why each investment class appeals to different types of investors.
5. Financial Advisor

### The Most Crucial Financial Ratios For Penny Stocks

Given adequate financial disclosure, investors can use some of the same financial ratios for valuing blue chip stocks to evaluate penny stocks.
6. Investing

### Game Theory: Beyond the Basics

Take your game theory knowledge to the next level by learning about the Nash Equilibrium.
7. Investing

### How to pick winning penny stocks

When choosing penny stocks, wise investors note several key factors that affect the way these stocks trade – and the inherent risks that can follow.
8. Tech

### 6 Dangerous Moves for First-Time Investors

First-time investors beware of these potentially disastrous decisions.
9. Investing

### August 2016 Top Penny Stocks (CDTI)

Penny stocks are generally risky; however, these five experienced an incredible run in July 2016 and look like they may keep going.
10. Investing

### Top Penny Stocks for October 2016 (MIFI, CLD)

These are top penny stocks to watch this fall.
Hot Definitions
1. ### Economies of Scale

Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
2. ### Quick Ratio

The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
3. ### Leverage

Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
4. ### Financial Risk

Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
5. ### Enterprise Value (EV)

Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
6. ### Relative Strength Index - RSI

Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center