Game Theory
- Analyzes situations where multiple decision-makers’ choices affect each other’s outcomes.
- Focuses on choices made using expected outcomes of actions and anticipating others’ responses.
- Applied to settings such as bargaining, negotiation, voting, and competition.
Definition
Section titled “Definition”Game theory is a branch of economics that studies strategic decision making. In game theory, a game is a situation in which multiple players interact and make decisions that affect each other’s outcomes.
Explanation
Section titled “Explanation”Game theory is based on the idea that individuals and organizations make decisions based on the expected outcomes of their actions. Players in a game choose actions while considering how those choices influence—and are influenced by—the choices of other players. The framework is used to analyze interactions where outcomes depend on the combination of all players’ decisions.
Examples
Section titled “Examples”Prisoner’s dilemma
Section titled “Prisoner’s dilemma”Two prisoners are each offered a reduced sentence if they betray their accomplice. However, if both prisoners betray each other, they both receive a longer sentence. The prisoners must decide whether to betray or remain silent, and the outcome depends on the actions of both prisoners. In this game, the dominant strategy for each prisoner is to betray, resulting in both prisoners receiving a longer sentence.
Ultimatum game
Section titled “Ultimatum game”One player is given a sum of money and must offer a portion of it to the second player. The second player can either accept the offer or reject it. If the offer is accepted, both players receive the agreed upon amount. If the offer is rejected, neither player receives anything. In this game, the dominant strategy for the first player is to offer the smallest possible amount, while the second player’s dominant strategy is to reject any offer that is less than half of the total amount.
Use cases
Section titled “Use cases”Game theory can be used to analyze a wide range of situations, from bargaining and negotiation to voting and competition. It can help individuals and organizations make strategic decisions by considering the potential actions and outcomes of other players and can be used to predict the behavior of other players and understand their motivations.
Related terms
Section titled “Related terms”- Prisoner’s dilemma
- Ultimatum game
- Dominant strategy
- Bargaining
- Negotiation
- Voting
- Competition