Game Theory

What is Game Theory?

Game theory is a theoretical framework for conceiving social situations among competing players.
In some respects, game theory is the science of strategy, or at least the optimal decision-making of independent and competing actors in a strategic setting.
The key pioneers of game theory were mathematicians John von Neumann and John Nash, as well as economist Oskar Morgenstern
Game theory is the study of the ways in which interacting choices of economic agents produce outcomes with respect to the preferences (or utilities) of those agents, where the outcomes in question might have been intended by none of the agents.
A group whose members pursue rational self-interest may all end up worse off than a group whose members act contrary to rational self-interest.

The focus of game theory is the game, which serves as a model of an interactive situation among rational players.
The key to game theory is that one player's payoff is contingent on the strategy implemented by the other player.
The game identifies the players' identities, preferences, and available strategies and how these strategies affect the outcome.
Depending on the model, various other requirements or assumptions may be necessary.
It is assumed players within the game are rational and will strive to maximize their payoffs.

Nash Equilibrium is an outcome reached that,

once achieved,

no player can increase payoff by changing decisions unilaterally.
It can also be thought of as "no regrets,"

in the sense that once a decision is made, the player will have no regrets concerning decisions considering the consequences.

The prisoner's dilemma is a standard example of a game analyzed in game theory that shows why two completely rational individuals might not cooperate, even if it appears that it is in their best interests to do so.
It was originally framed by Merrill Flood and Melvin Dresher while working at RAND in 1950.