What Is Game Theory?

Game theory studies how people make decisions, including the strategies they use in different circumstances and the possible outcomes of all players' choices. It dates back to the work of Jonathan Von Neumann and Oskar Morgenstern, who compared economics to gameplay in their 1944 book, The Theory of Games and Economic Behaviour. 

Real-life examples of game theory include the strategies you use when playing everyday games such as rock-paper-scissors, chess, or poker. However, you also can use game theory to analyse more complex real-world issues such as politics, the stock market, and economics. 

Understanding game theory can help you understand how you and others around you make decisions and may improve your negotiation skills in many contexts.

Types of games within game theory

Researchers categorise game theory by the strategies players employ and the information they have available to them when making decisions. Three broad categories of game theory are classical, combinatorial, and dynamic. Here's how they compare:

• Classic: All players know the decisions made by other players, and these decisions affect the outcomes for all players

• Combinatorial: Two-player games in which players take turns making a decision, and each decision impacts the next move

• Dynamic: Games that require making decisions over time, and each decision ultimately influences the following decisions

Within these broad categories, you find a variety of game theory examples. These games vary depending on factors like the number of players, knowledge of players' decisions, and the degree of cooperation required among the players.

Cooperative/non-cooperative

In a cooperative game, players can make agreements with each other and create joint strategies. In a non-cooperative game, joint strategies are only possible if the interested parties make decisions based on what provides the best outcome for themselves.

Games such as chess are non-cooperative, as you and your opponent seek to win individually. Conversely, a multi-player video game where several players work together to defeat a common enemy cooperates because the group working together has a better chance of success than those operating alone.

Perfect information/imperfect information

In some games, players have perfect information, which means each player is fully informed of past decisions. They also will be fully informed about the consequences of any future moves. The contrast is a game with imperfect information. In these games, the players need more information and must make decisions based on an incomplete understanding of the situation. 

Chess and checkers are examples of games with perfect information because you and your opponent know all the moves made on the board and all the possible remaining moves. In many card games, you have imperfect information because you know only the cards in your hands. Since you don't know your opponents' cards, you must fully understand the consequences of future moves.

Simultaneous/sequential

In a simultaneous game, each player moves at the same time, while a sequential game involves moves made sequentially. This sequencing of gameplay directly affects each player's strategy because, in one type (simultaneous), both players must move without knowing what the other will do. In a sequential game, they can decide after seeing what the opponent does.

Chess is a sequential game, with each player taking their turn after the other. You'll have time to review your opponent's decision before making your own. In a game like rock-paper-scissors, you both move simultaneously and reveal your decision—one you had to make without an idea of your opponent's strategy—at the same time.

Symmetric/asymmetric

Symmetric games consist of identical strategies for each player. Decisions in a symmetric game depend on the strategy, not the players. The prisoner's dilemma (a hypothetical scenario created by early game theory researchers at the Rand Corporation) is a classic example of a symmetric game because both players have the same choice and payoff. You can cooperate or betray each other, resulting in a moderate sentence for both, a harsh sentence for one, or a harsh punishment for both.

An asymmetric game, on the other hand, is a game in which a strategy can benefit one player while simultaneously penalising the other. The matching pennies game (commonly mentioned in game theory research) is an example of an asymmetric game because one player wins money while the other loses in each turn. This introduces the element of competition into the strategy.

Zero-sum/non-zero sum

In a zero-sum game, one player loses resources when the other gains resources, while the total amount of the resources stays the same. The card game poker is an example of a zero-sum game because it begins and ends with the same amount of money, even though it changes hands as players win and lose. When you win money, your opponents lose money.

Non-zero sum games have non-competitive qualities, in which players can cooperate to achieve an expected outcome. When you and a friend decide what movie to see, you engage in a non-zero-sum game because you both benefit from the outcome—spending time together—even if you collectively choose the move your friend prefers.

What is game theory used for?

Game theory can be applied in many situations when two or more people are making a decision, including advertising, voting in elections, and negotiating salaries. The following list highlights some common real-world applications of game theory in business, politics, economics, and more.

• Analysing market behaviour

• Casting a vote in an election

• Choosing a restaurant or type of entertainment

• Creating an advertising campaign

• Interviewing candidates for a job

• Setting prices for goods and services

• Yielding at an intersection

Who uses game theory?

Individuals in various fields use game theory, including economics, politics, business, and law. Some professions within these fields that are relevant to game theory include economists, politicians, sales personnel, retailers, lawyers, insurance adjusters, military personnel, business owners, project managers, and software developers.

For example, an economist may apply game theory to understand how external factors affect markets. A political scientist may use game theory to analyse how constituents vote and make predictions about an election. Business owners may turn to game theory to help set prices for their goods and services.

Pros and cons of using game theory

Game theory can effectively analyse strategy and decisions, leading to improved decision-making. Applying game theory to a situation allows you to examine the payoffs and strategies available to all players, giving you a different perspective on conflict. This can help guide you toward a clear understanding of the conflict so you can look for and negotiate an acceptable outcome for everyone involved. Game theory also allows you to consider the effects of variables and randomness in situations to analyse risk better.

However, game theory has limitations because you can only sometimes forecast people's actions. A single situation may have multiple competing factors influencing the outcome—some unknown. It also assumes that people act rationally and always decide in their best interests. When applying game theory, you may count all positive outcomes as strategies, even coincidental ones. At the same time, what appears to be intuition can be flawed by bias or assumption.

How to get started in game theory

You can get started in game theory by exploring online resources. Through these resources, you can learn more about game theory basics like the prisoner’s dilemma, the Nash equilibrium, and types of games. Some universities in India offer courses on game theory if you prefer studying in a formal education setting, and you can find online courses from universities worldwide.

Since game theory is a branch of mathematics, you can also choose to build your understanding of math. Math-related concepts such as probability, linear algebra, and statistics are useful for studying game theory.

Getting started with Coursera

Game theory provides a framework for analysing outcomes and understanding factors influencing decisions. As such, it has many applications in the real world, from popular recreational games to business and politics. Consider a course like Stanford University’s Game Theory on Coursera to learn more about game theory's applications. The eight modules in this course cover key concepts and categories of games and how they apply in the world.