Game theory is a mathematical framework for analyzing situations where two or more rational decision-makers interact strategically. It is used to study a wide range of situations, including business competition, political negotiations, and even social interactions.
One way to think about game theory is as a way to model the strategic interactions of different players. Each player has a set of possible choices, and each choice has a different set of outcomes. The goal of each player is to choose the strategy that will maximize their own payoff, given the strategies of the other players.
Real-world examples of game theory
Game theory can be applied to a wide range of real-world situations, including:
- Business competition: Companies use game theory to make decisions about pricing, product development, and marketing. For example, two companies that sell competing products may use game theory to decide how much to charge for their products.
- Political negotiations: Governments use game theory to negotiate treaties, trade deals, and other agreements. For example, two countries negotiating a trade deal may use game theory to decide how to allocate the benefits of the deal.
- Social interactions: Game theory can also be used to study social interactions, such as bargaining, dating, and cooperation. For example, two people negotiating the price of a car may use game theory to try to get the best deal possible.
Glossary of concepts/vocabulary related to game theory
Here is a glossary of some of the key concepts and vocabulary related to game theory:
- Player: A rational decision-maker who interacts with other players in a game.
- Strategy: A set of rules that a player follows when making decisions in a game.
- Payoff: The benefit or cost that a player receives from a particular outcome of a game.
- Nash equilibrium: A strategy profile where no player can improve their payoff by unilaterally changing their strategy.
- Dominant strategy: A strategy that is better than any other strategy, regardless of what the other players do.
- Zero-sum game: A game where the total payoff of all players is always zero.
- Non-zero-sum game: A game where the total payoff of all players does not have to be zero.
- Cooperative game: A game where players can communicate and make agreements to coordinate their strategies.
- Non-cooperative game: A game where players cannot communicate or make agreements to coordinate their strategies.
I hope this explanation of game theory has been helpful. Please let me know if you have any other questions.