What Is Game Theory?

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Game theory can be applied in chess as well as in business.
Game theory can be applied in chess as well as in business. (Image: Thinkstock/Comstock/Getty Images)

Game theory is defined as the philosophical analysis of the means by which events happen through the decisive synergy among viable factors. It involves the study of those outcomes as stemming from conscious individual actions among social components. It is applicable to specific situations and has constantly been undergoing situation-specific evolution and development.

History

In 1944, mathematician John von Neumann and economist Oskar Morgenstern collaborated to form a framework for social and economic strategies using mathematical theories. Significant game theory-related philosophies had been observed by Greek philosopher Socrates, as told in the Laches and Symposium, works of his student Plato. The theory was implemented by the Spanish conqueror Cortez against the Aztecs and used in Shakespearean literature and by Hobbes in his proposals on tyranny. Since then, real-world events have been analyzed, planned and strategized on using the principles of game theory.

Basic Elements and Assumptions

The abstract concept of utility describes how economic agents are accorded with free choices in forming conclusions. Decision making involves ranking of options according to the outcomes they are expected to produce. This is done to come up with the best possible resolution to a problem or situation. Games refer to the way a person increases his effectiveness by anticipating the opponent’s response to his actions. Simply put, the person studies which strategy will prove most advantageous to him using background information. Games are equated to game trees, which are mathematically directed graphs leading to one common point, where leftmost items take precedence over rightmost ones. Matrices are sometimes used instead of game trees, which work with columns and rows instead of branches. Both game rationalizations take note of uncertainties, risks and sequential equilibria.

Branches, Solution Concepts and Equilibria

Game theory has two primary forms: cooperative and noncooperative. Both branches deal with how rationally intelligent individuals face each other to bring about a mutual satisfactory conclusion to any given situation. Game solutions are equated to a principle of balance or equilibria. Although events can have varying outcomes based on what agents pursue as their course of action, a state of stability is eventually reached. This is the state in which all conditions are desirably met and resolution is arrived on. This also supports the concept that enough repetitions of events will produce a state of balance or equilibrium.

Applications

Game theory proves relevant in games like bridge, poker and chess. However, it also finds practical applications in real-life affairs: choices of favorable political candidates, salary negotiations, the arms races, military strategies, vaccination administration policies and even studies on national welfare.

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