Game theory is the analysis of strategic interaction. Strategic interaction occurs between people—or between animal species, or firms, or armies, or robots—when the outcome of the interaction depends not just on the choices made by one of the agents but by the actions chosen by several of them. “Survival of the fittest” in biology, hiring a contractor to build your house, and a clone war among programmed robots are all applications of game theory.
Game theory is not just about conflict. While Thomas Shelling wrote a book called The Strategy of Conflict, Robert Axelrod wrote one called The Evolution of Cooperation, and Mancur Olson wrote one about The Logic of Collective Action. All of them are about game theory. Some “games”—i.e., strategic interactions—induce inevitable or avoidable conflict, others facilitate cooperation, some games are about achieving collective outcomes while individual incentives are misaligned. In short, game theory is about the way human beings (and, incidentally, many animals and organisations) interact with one another in non-trivial situations and tries to understand how the agents behave and what outcome to expect.
Examples of strategic interactions: (1) You interview for a job. Whether or not you get hired depends on how you perform in the interview, but also on how other applicants perform in their interviews and what expectations the employer has and what questions they choose to ask. Any one of those factors determines the outcome of the job interview. You need to anticipate, have a plan, and choose your strategy knowing that others have their strategy as well.
(2) Firm A develops a brand new product that changes the way we do _____. (Fill in what you may.) Being a game changer, firm A hopes to reap untold profits from its innovation. However, whether the product earns these profits depends on whether and how consumers adopt the product; what competitors will do: sit by the sidelines and let firm A disrupt the industry or adapt and innovate on their own, making sure that firm A does not steal their entire customers; and possibly on the regulator who may change the rules that makes it hard for firm A to do business and protects incumbent players.
(3) You want to design a secure web site that is safe against a distributed denial of service (or other malicious) attack. The outcome depends on your own design choices but also that of the tactics of potential attackers.
Game theory analyses the forces that drive agents to act in a particular way, seeking to act in a way consistent with their individual objectives. The collective outcome that results from the individual behaviours is what game theorists call an equilibrium.
Game theory can help you become a better strategist by teaching you to look for the forces that drive individual behaviour and how the interaction shapes them. A good strategist tries to understand the position the other players are in and understand what their objectives and options are. He should also try to understand how potentially changing the rules of the game changes those forces and hence the expected outcome.
Studying game theory formally requires a fair bit of math. That’s because most textbooks and courses focus on the technical aspects of game theory, i.e., the mathematical formulation of the social situation and the technical aspects of finding equilibria. But there are also very useful, non-formal lessons from game theory for the non-technical reader. Examples of the latter kind are
Game theory is not just about conflict. While Thomas Shelling wrote a book called The Strategy of Conflict, Robert Axelrod wrote one called The Evolution of Cooperation, and Mancur Olson wrote one about The Logic of Collective Action. All of them are about game theory. Some “games”—i.e., strategic interactions—induce inevitable or avoidable conflict, others facilitate cooperation, some games are about achieving collective outcomes while individual incentives are misaligned. In short, game theory is about the way human beings (and, incidentally, many animals and organisations) interact with one another in non-trivial situations and tries to understand how the agents behave and what outcome to expect.
Examples of strategic interactions: (1) You interview for a job. Whether or not you get hired depends on how you perform in the interview, but also on how other applicants perform in their interviews and what expectations the employer has and what questions they choose to ask. Any one of those factors determines the outcome of the job interview. You need to anticipate, have a plan, and choose your strategy knowing that others have their strategy as well.
(2) Firm A develops a brand new product that changes the way we do _____. (Fill in what you may.) Being a game changer, firm A hopes to reap untold profits from its innovation. However, whether the product earns these profits depends on whether and how consumers adopt the product; what competitors will do: sit by the sidelines and let firm A disrupt the industry or adapt and innovate on their own, making sure that firm A does not steal their entire customers; and possibly on the regulator who may change the rules that makes it hard for firm A to do business and protects incumbent players.
(3) You want to design a secure web site that is safe against a distributed denial of service (or other malicious) attack. The outcome depends on your own design choices but also that of the tactics of potential attackers.
Game theory analyses the forces that drive agents to act in a particular way, seeking to act in a way consistent with their individual objectives. The collective outcome that results from the individual behaviours is what game theorists call an equilibrium.
Game theory can help you become a better strategist by teaching you to look for the forces that drive individual behaviour and how the interaction shapes them. A good strategist tries to understand the position the other players are in and understand what their objectives and options are. He should also try to understand how potentially changing the rules of the game changes those forces and hence the expected outcome.
Studying game theory formally requires a fair bit of math. That’s because most textbooks and courses focus on the technical aspects of game theory, i.e., the mathematical formulation of the social situation and the technical aspects of finding equilibria. But there are also very useful, non-formal lessons from game theory for the non-technical reader. Examples of the latter kind are
- Brandenburger and Nalebuff, Co-opetition — business reader.
- Dixit and Nalebuff, Thinking Strategically — business reader.
- Thomas Schelling, Micromotives and Macrobehavior — general audience, social science.
- Thomas Schelling, The Strategy of Conflict — classic on strategy, negotiation and the logic of deterrence.
- Richard Dawkin, The Selfish Gene — game theory drives evolution.
- Steven Tadelis, Game Theory, An Introduction.
- Avinash Dixit et al., Games of Strategy.
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