Game Theory
Game theory is the study of how and why individuals and entities (called players) make decisions about their situations. It is a theoretical framework for conceiving social scenarios among competing players.
In some respects, game theory is the science of strategy, or at least of the optimal decision-making of independent and competing actors in a strategic setting.
Game theory is used in a variety of fields to lay out various situations and predict their most likely outcomes. Businesses may use it, for example, to set prices, decide whether to acquire another firm, and determine how to handle a lawsuit.
Definition: Game theory is the study of how and why individuals and entities (called "players") make decisions in their respective situations. It is a theoretical framework for conceiving social situations among competing players. In some ways, game theory is the science of strategy, or at least the science of optimal decision-making by independent and competing actors in a strategic setting. Game theory is used in various fields to describe different situations and predict their most likely outcomes. For example, companies may use game theory to set prices, decide whether to acquire another company, and determine how to handle litigation.
Origin: The origins of game theory can be traced back to the 18th century, but its modern form was primarily established by John von Neumann and Oskar Morgenstern in their 1944 book "Theory of Games and Economic Behavior." This book marked the birth of game theory as an independent discipline and laid the foundation for its application in economics, political science, and other social sciences.
Categories and Characteristics: Game theory is mainly divided into two categories: cooperative game theory and non-cooperative game theory.
- Cooperative Game Theory: Studies how players can achieve mutual benefits through cooperation. Its characteristic is that players can form coalitions and negotiate to distribute the gains.
- Non-Cooperative Game Theory: Studies how players make decisions independently without cooperation. Its characteristic is that each player acts independently with the goal of maximizing their own benefit.
Specific Cases:
- Prisoner's Dilemma: One of the most famous cases in game theory. Two criminal suspects are arrested; if both remain silent, they each get a light sentence; if one confesses while the other remains silent, the confessor is released while the other gets a heavy sentence; if both confess, they each get a moderate sentence. The best strategy is to confess, but this is not the optimal outcome.
- Corporate Pricing Strategy: When two competing companies decide on product prices, if one lowers the price while the other does not, the one who lowers the price gains more market share; if both lower prices, market share changes little but profits decrease; if both do not lower prices, market share and profits remain stable. Game theory helps companies analyze potential reactions from competitors to formulate the best pricing strategy.
Common Questions:
- Is game theory only applicable to economics? No, game theory is widely applied in political science, psychology, biology, and many other fields.
- Can game theory predict the outcome of all situations? Game theory provides an analytical framework but cannot guarantee the prediction of all outcomes, as real-world situations may be influenced by various uncontrollable factors.
