Game theory has a wide range of applications, including economics, political science, psychology, and biology. In economics, game theory is used to study competition and cooperation between firms, consumers, and governments. In political science, it is used to study voting behavior, campaign strategy, and the development of international relations. In psychology, game theory is used to study social interaction and decision-making. In biology, it is used to study the evolution of behavior in animals.
One of the key concepts in game theory is the "game," which is a formal model of a strategic interaction between two or more actors. A game consists of a set of players, a set of strategies for each player, and a set of payoffs for each combination of strategies.
There are several different types of games, including cooperative games, in which players can make binding agreements to cooperate, and non-cooperative games, in which players cannot make binding agreements. Within the category of non-cooperative games, there are further subcategories, such as simultaneous-move games and sequential-move games.
One of the most famous game theory models is the prisoner's dilemma, which illustrates the tension between cooperation and self-interest. In the prisoner's dilemma, two prisoners are being held in separate cells and are given the following options:
If both prisoners remain silent, they will each serve one year in prison.
If one prisoner betrays the other by confessing, while the other remains silent, the confessing prisoner will be set free, while the silent prisoner will serve three years in prison.
If both prisoners confess, they will each serve two years in prison.
In this game, the rational choice for each prisoner is to confess, since this leads to the lowest possible sentence. However, if both prisoners cooperate and remain silent, they would both serve only one year in prison. This illustrates the tension between cooperation and self-interest that is often present in strategic interactions.
Game theory has made significant contributions to our understanding of strategic decision-making and has had numerous practical applications. However, it is important to note that game theory assumes that actors are rational and self-interested, which may not always be the case in real-world situations. As such, game theory should be used with caution and in combination with other tools for understanding human behavior.