Game theory is the study of decision-making in situations where multiple individuals or entities are involved. It is a branch of mathematics and economics that examines how people make choices based on their beliefs, preferences, and expectations of others’ actions. In essence, game theory attempts to predict how rational actors will interact with each other in strategic situations.
Game theory was first introduced by mathematicians John von Neumann and Oskar Morgenstern in 1944. They published a book called “Theory of Games and Economic Behavior,” which laid the groundwork for what would become game theory. Since then, game theory has been applied to various fields such as economics, political science, psychology, biology, and computer science.
One classic example of game theory is the Prisoner’s Dilemma. Two suspects are arrested for a crime and are put in separate cells.
The police offer each suspect a deal: if one confesses and the other stays silent, the confessor will be given a reduced sentence while the other will receive a harsher sentence. If both confess, they will both receive moderate sentences. If both remain silent, they will both be released due to lack of evidence.
In this scenario, each prisoner has to consider what the other prisoner might do before making their own decision. If they believe that the other prisoner will stay silent, then it would be advantageous for them to confess because they can get off with a reduced sentence while their partner gets a harsher one. However, if both prisoners think this way and confess, then they both end up with moderate sentences instead of being released.
Another example is the Battle of the Sexes game. A couple wants to spend an evening together but cannot decide on what activity to do – watch football or go to the opera?
The husband prefers watching football while his wife prefers going to the opera. If they go to separate events, they will be disappointed. If they go together, they will both enjoy the event but not as much as if they went to their preferred activity.
In this game, each spouse has to consider what the other spouse might do before making their decision. If the husband thinks that his wife will choose the opera, then it would be advantageous for him to choose the opera as well because he would rather spend time with his wife than watch football alone.
The same logic applies to the wife. However, if both choose differently, then they end up in a situation where neither of them is happy.
Game theory is a powerful tool for understanding how people make decisions in strategic situations. It can help us predict how rational actors will behave and how we can improve our own decision-making processes. By examining examples like the Prisoner’s Dilemma and the Battle of the Sexes game, we can see how game theory applies to real-world scenarios and gain a deeper appreciation for its applications in various fields.