What is Game Theory?
Every Tuesday is a Game Theory article at Mind Your Decisions.
It’s strange when you think about how television and movies affect your life. It was the Teenage Mutant Ninja Turtles that inspired me to learn Shotokan karate for almost seven years. And it was the movie A Beautiful Mind that interested me to study game theory, one of my favorite subjects. Game theory is interesting because you can use its results to make better strategic decisions. In the future, I will write about how you can apply game theory to your finances and life decisions, from topics like negotiating a better job contract to selling your goods on Craig’s List. For today, I provide a short history of the field as an introduction.
History
Game theory is a branch of economics, with roots in applied mathematics, that studies how players of a mathematically formalized game can best maximize their returns. The field formally began with the 1944 publication Theory of Games and Economic Behavior by John von Neumann and Oskar Morgenstern. The book addressed types of games known as “zero-sum” games in which the gains of one player must be the losses of another. A game like poker falls in this category because money you earn is money that some one else loses.
In the 1950s, the field of game theory grew substantially, and new topics were introduced like cooperative games, non-cooperative games, and repeated games. It was during this time that the famous “prisoner’s dilemma” game was created and John Nash wrote his dissertation at Princeton about a solution concept, now known as the “Nash Equilibrium.”
Game theory has even affected the fields political science, business, evolutionary biology, computer science, and philosophy. The field has gathered such fame that the Nobel prizes in 1994 and 2005 were awarded to economists primarily for their contributions to game theory.
I’ll conclude with a passage from the economist Avinash Dixit that really hits at the core of game theory analysis:
Game theory studies interactive decision-making, where the outcome for each participant or “player” depends on the actions of all. If you are a player in such a game, when choosing your course of action or “strategy” you must take into account the choices of others. But in thinking about their choices, you must recognize that they are thinking about yours, and in turn trying to take into account your thinking about their thinking, and so on.
It would seem that such thinking about thinking must be so complex and subtle that its successful practice must remain an arcane art. Indeed, some aspects such as figuring out the true motives of rivals and recognizing complex patterns do often resist logical analysis. But many aspects of strategy can be studied and systematized into a science — game theory.
