Understand game theory and find out where you can learn more about using this theorem in real-life applications.
Game theory is one of the most exciting concepts used by mathematicians, economists, and even psychologists to identify the best outcomes for games between two or more players. This article covers the definition of the concept, types of games, applications, and books that go deeper into the subject.
What is game theory?
Game theory, or game-theoretic, is an economic theory designed to help people apply specific concepts to strategic situations. It starts with the premise that people judge scenarios based on their perception of others. Therefore, your understanding of a particular player affects your reasonable behavior.
Entering someone else’s mind is crucial for improving your decision-making process when faced with an opponent of sorts. But although mainly used in economics, game theory has many applications.
A light association with the idea of children’s games doesn’t make it less valuable. John Von Neumann’s approach to decision-making may help even in economic crises, negotiations, auctions, product pricing, conflicts, etc.
Game theory types
Symmetric and asymmetric
Simultaneous and sequential games
Cooperative and non-cooperative
Zero-sum and non-zero-sum games
One shot and repeated games (iterative games)
Imperfect information games
Prisoner’s dilemma – A classic game theory example
To better understand the concept, take a look at a staple example used in game theory called the prisoner’s dilemma. It analyzes the scenario in which the police arrest two criminals for a crime but don’t have hard evidence to convict them.
Therefore, getting a confession is essential.
The police interrogate the prisoners separately, don’t let them communicate, and give them four possible deals:
A five-year sentence if both confess
A three-year sentence if prisoner one confesses and nine years for prisoner two if he doesn’t confess
A 10-year sentence for prisoner one if he doesn’t confess and two years for prisoner two if he confesses
A two-year sentence for both if no one confesses
Although the last outcome is the best, the lack of communication makes it impossible to coordinate and stay quiet. It’s more likely that one prisoner will confess to avoid getting the five-year sentence because they might not trust the other one to stay quiet.
Various similar game theory exercises come with real-world applications in economics, business, politics, and other fields.
Best game theory books
Game Theory: An Introduction by Steven Tadelis
Published by the Princeton University Press, this one of the best books on game theory, and it serves as an excellent introduction to rationality, optimization, decision-making, and complex game theory concepts. The book’s author does a great job of simplifying the principles for readers without a mathematical background.
Even better, the book presents multiple examples of applying game theory in political science, business strategy, etc.
Game Theory by Michael Maschler, Eilon Solan, and Shmuel Zamir
This comprehensive 1,003-page book is a detailed introduction to game theory concepts. It’s a solid read for readers with a background in mathematics and even comes with practical exercises in each chapter.
The book tackles multiple topics, like equilibrium refinements, classical cooperative game theory, bargaining sets, Shapley value, mathematics of linear programming, fixed-point theory, etc. Given enough patience, game theory beginners can get a lot of value out of this book.
Theory of Games and Economic Behavior by Oskar Morgenstern, John Von Neuman, Harold William Kuhn, and Ariel Rubinstein
The 60th commemorative edition of this book explains the revolutionary mathematical theory using real-world examples. In addition, the book comes with extra reading material in the form of articles and reviews from game theory specialists.
Although it’s a heavy read at times, drawing from real-world scenarios helped the authors explain game theory even to those uninitiated in the field.
The Art of Strategy by Avinash Dixit
This book guides readers on how to succeed in life and business as rational players, using pure strategy. It explains the importance of predicting a rival’s moves, anticipating curveballs, and more.
The author’s practical insights explain many optimal strategies for determining possible outcomes and dealing with counterintuitive decisions.
The Complete Idiot’s Guide to Game Theory by Edward C. Rosenthal
Game theorist Edward C. Rosenthal touches on the history of game theory and offers a non-technical introduction to the subject. But what makes this book even more remarkable is the contributions of John Nash, author of “A Beautiful Mind” and Nobel Prize laureate.
The Joy of Game Theory: An Introduction to Strategic Thinking by Persh Talwalkar
This book presents the game theory concept in the context of leadership. The author explains how people can use game theory to resolve “The Leader’s Dilemma” and observe flaws in subordinates.
It offers an exciting take on balancing between the best responses and mediocre outcomes.
Stability and Perfection of Nash Equilibria by Eric van Damme
The Nash equilibrium is one of the essential concepts in game theory. Named after famed mathematician John Nash, the strategy refers to the ideal way to find a solution in a non-cooperative game of two or more players.
But this book goes deeper into the subject as the author presents a series of notes on the drawbacks of using Nash equilibria.
Micromotives and Macrobehavior by Thomas C. Schelling
This game theory book discusses how rational individuals make decisions in a particular scenario. It looks at their decision-making when the best solutions depend on the choices of others.
The book examines this concept from the prism of public policy analysis.
Game Theory: Analysis of Conflict by Roger Myerson
This book is a deep study of the modern advances of game theory. Myerson covers over 15 years of improvements and debunked concepts in various game theory models.
Furthermore, the book explains many methodological principles and fundamentals. It works as individual study material and as a classroom companion book. Published by the Harvard University Press, this is one of the most cited papers on the subject.
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What is an example of game theory?
The volunteer’s dilemma is an example of game theory analysis. It offers a scenario in which a person must volunteer for a task or assume responsibility for the common good. Imagine uncovering accounting fraud in a company.
Becoming a whistleblower can have negative repercussions for the volunteer. However, remaining silent allows the fraud to continue, potentially ruining the company in the process and costing everyone their jobs.
Is game theory math or economics?
Game theory is both math and economics. It’s a branch of mathematics with contributions from mathematicians and economists created for economics but with applications in psychology, political science, social science, and other fields.
What is a zero-sum game?
A zero-sum game is the mathematical representation used to detail a game between decision makers where one person’s loss leads to an equivalent loss for the other player.
What is John Nash’s game theory?
Similar to John Charles Harsanyi, mathematician John Nash contributed to game theory with the Nash equilibrium, one of the most common winning strategies in such games.
What is a Nash equilibrium?
Developed by John Nash, the Nash equilibrium is a scenario in which the dominant strategy is to stick to the first strategy without deviating, regardless of incentives.