What is game theory?

Game theory is considered to be one of the most important theories not simply within the field of economics, but also mathematics, political science, biology, philosophy, and ecology, just to name a few. It has been developed over the many years since the term was first coined to what it is now: a theory used to “understand the strategic behaviour of decision makers who are aware that their decisions affect one another.” Game theory was initially developed by John von Neumann (1903–57) and Oskar Morgenstern (1902–77) in 1944 as a mathematical theory. Following on from this, in 1944 Neumann published The Theory of Games and Economic Behavior co-authored with Morgenstern. This is considered to be one of the main foundation texts of game theory.

Despite the theory’s origins dating back to Neumann and Morgenstern’s work, the economists John Nash, John Harsanyi, and Reinhard Selten received the Nobel Prize for Economics in 1994 for further developing game theory in relation to economics. Here are some interesting facts on the field; from its key influencers and terms, to how it applies in everyday life and examples.

• Game theory can be thought of as an extension of decision theory. In standard decision theory, each agent has utilities associated with outcomes. However, in game theory each agent also has to consider the utilities of other agents and how they will affect the other agent’s decisions and the overall outcome.
• The term ‘Tit for Tat’ is a concept used in the mathematical side of game theory. It is used to describe when a player responds with the same action or move used by an opponent in the previous action or move.

• One of the most celebrated theorems of game theory is referred to as the minimax theorem. This theorem explains that there is always a solution to a conflict between two people with opposing interests.
• “Common Knowledge” is widely used in game theory. This refers to the assumption in games that everyone knows a piece of information but does not essentially know if everyone else knows it too.
•  Focal point or Schelling point is one of the many key terms used in game theory. It was developed by the American economist Thomas Schelling in his book The Strategy of Conflict which was published in 1960. Thomas Schelling and Robert J. Aumann both were awarded a noble Prize in economics for developing game theory analysis in 2005.
•  Prisoner’s Dilemma is one of the best known examples of games analysed in game theory. The name’s origin comes from a situation that involves two prisoners who would have to choose either ‘confess’ or ‘don’t confess’ without knowing what the other person will choose. This game aims to illustrate how people behave in tactical situations.
•  Another widely used example is known as the Battle of the Sexes Game. For instance, two partners would like to share an evening together. However, they have two different ideas of what they would like to do but still would prefer to be together than attend two separate events. This game is used to demonstrate the pros and cons of coordination.
• John Forbes Nash Jr was an American mathematician renowned for his contribution to game theory. The phrase Nash equilibrium used in game theory is named after him.

Featured image credit: checkmate chess by Stevepb. Public domain via Pixabay.