Game Theory

In many situations, people and businesses cannot decide what to do in isolation, because the best choice depends on what others will do. Game theory provides tools for analysing these interactions, which are called games.

The field was founded by mathematician John von Neumann and economist Oskar Morgenstern in their 1944 book Theory of Games and Economic Behavior, and developed further by John Nash and others.

For example, two competing companies deciding whether to cut prices face a game. If one cuts prices and the other does not, the first may win customers. If both cut, both earn less. Each must consider how the other will respond.

Game theory is used in economics, business strategy, auctions, negotiations, politics, international relations and biology. Key concepts include Nash equilibrium, where no player can do better by changing strategy alone, and the prisoner's dilemma, which shows why cooperation can be difficult even when it would benefit everyone.