What is Game Theory?
Game theory has been defined as the study of the ways in which economic agents produce outcomes while making preferences, even while the outcomes may not have been intended by the agents. John Von Neumann and Oskar Morgenstern in the book The Theory of Games and Economic Behaviour in 1944 came up with the game theory. This theory maps the strategic interaction between two or more players. All arrays of games discussed show that the games are interdependent i.e. the outcome of each player is dependent on the strategies of the other players involved in the game. Game theory is a mathematical model of cooperation and conflict between decision makers.
What are the Assumptions in Game theory?
There is an assumption of rationality of the decision makers or the economic agents. This implies that decision makers will strive to maximise their gains in the game. It is also assumed that when the game is being set up, the outcomes listed will also include the sum of all gains associated with the outcome.
Significance of the Game Theory
This classical theory is important for formulating alternative strategies to compete with one another in any given situation, thereby making it an indispensable tool in decision making. Also, there are several derivative theories that play a crucial role in microeconomic analysis that have found its origins in this theory. This includes the prisoner’s dilemma, Nash equilibrium and zero sum game. How is Game Theory Applied in Real Life? Game theory is used to study not just human behaviour, but that of animals too. Economists use it to analyse economic competition, and other economic phenomena such as bargaining, auctions, voting theory etc. People use the concept of game theory, knowingly or unknowingly, in a lot of everyday interactions. For example, one can use it to make salary negotiations with one’s employer. One can even use it to make decisions, make projections and receive significant payoffs in fantasy games or a game of poker. The concept of zero sum game has been extensively used in policy making and in international relations and interactions between two states.
