Overview
Life is a game. Your success depends not just on what you do, but on what others do. Game theory analyzes these strategic interactions, from poker to nuclear war.
Core Idea
Nash Equilibrium: A situation where no player can benefit by changing their strategy while the other players keep theirs unchanged. It’s a state of “no regrets.”
Formal Definition (if applicable)
Prisoner’s Dilemma: A standard example where two rational individuals might not cooperate, even if it appears that it is in their best interest to do so.
- If both cooperate: 1 year jail each.
- If one betrays: 0 years for betrayer, 3 years for cooperator.
- If both betray: 2 years jail each. Nash Equilibrium: Both betray (and get a worse outcome than if they cooperated).
Intuition
Imagine two drivers at an intersection.
- If both go: Crash (Bad).
- If both stop: Wait (Okay).
- If one goes and one stops: Smooth traffic (Good). Game theory helps predict what will happen.
Examples
- Cold War: Mutually Assured Destruction (MAD) was a Nash Equilibrium.
- Auctions: Designing rules to get people to bid their true value.
- Evolutionary Biology: Hawk-Dove game explaining animal aggression.
Common Misconceptions
- “It’s about winning games.” (It’s about understanding strategy in any interaction.)
- “Rational means selfish.” (You can have altruistic preferences in game theory.)
Related Concepts
- Zero-Sum Game: One person’s gain is another’s loss (Poker).
- Non-Zero-Sum Game: Win-win or lose-lose is possible (Trade).
- Coordination Game: Players benefit from choosing the same option (Driving on the right side of the road).
Applications
- Economics: Oligopoly pricing.
- Political Science: Voting systems and international treaties.
- Computer Science: Network routing and AI.
Criticism / Limitations
Assumes players are perfectly rational and have infinite computing power, which real humans do not.
Further Reading
- Von Neumann & Morgenstern, Theory of Games and Economic Behavior
- Schelling, The Strategy of Conflict