Game theory is a branch of mathematics that studies strategic decision-making. It is widely used in the field of economics, politics, psychology, and sociology to analyze the behavior of individuals, organizations, and governments in situations where they have to make choices that affect each other.
Game theory models are mathematical representations of interactions between two or more agents who must make decisions based on the outcomes of their interactions. There are several types of game theory models, each with its own set of assumptions and mathematical formulas.
One of the most popular game theory models is called the Prisoner’s Dilemma. This model involves two criminals who are arrested for a crime and placed in separate cells.
The prosecutor offers both criminals a deal: if one confesses and implicates the other, he will go free while the other will receive a long prison sentence. If both confess, they will receive a shorter prison sentence. If both remain silent, they will receive a moderate prison sentence.
The key feature of this model is that both criminals have an incentive to confess because it is in their self-interest to do so. However, if they both confess, they will end up worse off than if they had both remained silent. This model illustrates how self-interested behavior can lead to suboptimal outcomes for everyone involved.
Another game theory model is called the Nash Equilibrium. This model involves two or more players who must make decisions based on what they think their opponents will do. The Nash Equilibrium is a state in which no player can improve their outcome by changing their strategy without causing another player to be worse off.
For example, consider a game where two players must choose between two options: A or B. If both players choose A, they each receive a payoff of 1.
If both players choose B, they each receive a payoff of 2. If one player chooses A while the other chooses B, the player who chose B receives a payoff of 3 while the player who chose A receives a payoff of 0.
In this game, the Nash Equilibrium is for both players to choose B because neither player can improve their outcome by switching to A. If one player switches to A while the other continues to choose B, the player who switched will receive a payoff of 0 while the other player will receive a payoff of 3.
A third game theory model is called the Ultimatum Game. This model involves two players: a proposer and a responder. The proposer must divide a sum of money between themselves and the responder.
The responder can either accept or reject the offer. If they accept, both players receive their respective shares of the money. If they reject, neither player receives any money.
The key feature of this model is that it illustrates how fairness considerations can influence decision-making. If the proposer offers too little, the responder may reject out of spite even if it means receiving nothing. On the other hand, if the proposer offers too much, they may feel like they are being taken advantage of and reject as well.
In conclusion, game theory models are useful tools for analyzing strategic decision-making in various fields. The Prisoner’s Dilemma illustrates how self-interested behavior can lead to suboptimal outcomes for everyone involved while the Nash Equilibrium shows how players can reach stable outcomes by anticipating each other’s actions. The Ultimatum Game highlights how fairness considerations can influence decision-making in situations where there is no clear objective criterion for dividing resources.