Game theory is the study of decision problems in competitive situations.

Game theory is the study of decision problems in competitive situations.

Economists call it game theory; psychologists call it the theory of social situations. Game theory is the study of decision problems in competitive situations. Game theory is the procedure for analyzing and deriving rules for making decisions when two or more people or organizations are competing for some objective. It was developed by a mathematician John Von Neumann over 50 years ago. It is a distinct and interdisciplinary approach to the study of human behaviour and it is a branch of mathematical analysis developed to study decision making in conflict situations. It provides a mathematical process for selecting the optimum strategy in the face of an opponent who has a strategy of his own. It can improve one’s ability to run a business or to evaluate changes in a policy. To choose rationally is to maximise one’s own rewards. Game theory is complex and the outcome not only depends on one’s own strategies and “market conditions’ but also the strategies of other decision makers. John C. Harsanyi, John Nash, and Reinhard Selten were awarded the Noble Peace Prize in 1994 for their excellent work and progress in game theory and used games like chess and poker as the foundation for understanding complex economic issues. Game theory found all kinds of immediate applications in the 1950’s to problems of the Cold War, everything from airplane dog-fights to massive retaliation. For example, American foreign policy since WWII has been based on the strategic assumption that no country will attack the USA in fear of retaliation which would be greater than the original strike. This theory heavily played a part in the politics of the Cold war. Strategies are difficult to model quantitively and depend on a large number of factors, including (very importantly) the result of previous games. It is easiest to model games with few players – and so game theory is used in Microeconomics to explain the behaviour in o…


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