Game Theory

Updated Feb 26, 2023

Definition of Game Theory

Game theory is the study of strategic decision-making. That means it is the study of how people behave and interact when they have to make strategic decisions that affect each other. It is used to analyze and predict the behavior of individuals and groups in these strategic situations.

Example

To illustrate this, let’s look at a classic example of game theory: the Prisoner’s Dilemma. In this scenario, two prisoners are accused of a crime and are being interrogated separately. Each prisoner is given the same offer: if one of them confesses and the other stays silent, the one who confesses will go free while the other will be sentenced to 10 years in prison. If both confess, they will both be sentenced to 5 years in prison. If both stay silent, they will both be sentenced to 1 year in prison.

In this scenario, the prisoners have to make a decision that affects the other person. If one of them confesses, the other one will be worse off. Thus, the prisoners have to decide whether to cooperate or defect. Unfortunately for them, in this example, the dominant strategy is to confess, which means they’ll most likely both go to prison (check out our post on the Prisoner’s Dilemma) to learn more.

Why Game Theory Matters

Game theory is an important tool for understanding and predicting human behavior in strategic situations. It can be used to analyze and predict the behavior of individuals and groups in a wide range of situations, from business negotiations to international politics. It can also be used to design strategies for decision-making in complex situations. Thus, game theory is an invaluable tool for understanding and predicting human behavior in strategic situations.