Overview

Game Theory is the science of strategy. It’s not just about games like chess or poker; it’s about any situation where your success depends on what others do. It applies to war, business, biology, and dating.

Core Idea

The core idea is interdependence. In a “game,” the outcome for each player depends on the actions of all players. You must anticipate what others will do, knowing they are anticipating what you will do.

Formal Definition

The study of mathematical models of conflict and cooperation between intelligent rational decision-makers.

Intuition

  • The Prisoner’s Dilemma: Two criminals are arrested.
    • If both stay silent, they get 1 year.
    • If one betrays and the other stays silent, the betrayer goes free, and the silent one gets 10 years.
    • If both betray, they get 5 years.
    • Result: Rational self-interest leads both to betray, resulting in a worse outcome for both (5 years) than if they had cooperated (1 year).

Examples

  • Nuclear War (Mutually Assured Destruction): A game of “Chicken.” If one side backs down, they lose face. If neither backs down, everyone dies.
  • Evolution: Animals play games. Hawks (aggressive) vs. Doves (peaceful). The stable ratio of hawks to doves is a Game Theory equilibrium.
  • Auctions: How much should you bid? It depends on what you think others will bid.

Common Misconceptions

  • Misconception: It’s about winning.
    • Correction: It’s often about finding an Equilibrium (Nash Equilibrium)—a state where no player can improve their situation by changing their strategy alone.
  • Misconception: People are always rational.
    • Correction: Traditional Game Theory assumes rationality. Behavioral Game Theory accounts for human irrationality (emotions, fairness).

Applications

  • Economics: Pricing strategies, oligopolies.
  • Political Science: Voting systems, international treaties.
  • Biology: Evolutionary Stable Strategies.

Criticism and Limitations

  • Rationality Assumption: Real humans often act out of spite or altruism, violating the “rational” predictions.

Further Reading

  • The Evolution of Cooperation by Robert Axelrod
  • Thinking Strategically by Avinash Dixit