Game Theory
The study of strategic interaction — how rational decision-makers behave when the outcome depends on the choices of others.
The Idea
When your best move depends on what others do, and their best move depends on what you do, you’re in a game. Game theory provides frameworks to analyze these situations.
Key Concepts
- Zero-sum vs. non-zero-sum: In zero-sum, one’s gain is another’s loss. In non-zero-sum, all players can win (or lose) together
- Nash Equilibrium: A state where no player can improve their outcome by unilaterally changing strategy
- Prisoner’s Dilemma: Two players acting in self-interest produce a worse outcome than if they had cooperated
- Dominant strategy: A strategy that is best regardless of what others do
Classic Examples
- Prisoner’s Dilemma: Arms races, price wars, climate change negotiations
- Chicken: Nuclear brinkmanship, aggressive negotiations
- Coordination games: Choosing which side of the road to drive on, tech standards
- Tit-for-tat: In repeated games, cooperating first and then mirroring the opponent often wins
How to Apply
- Ask “What game are we playing?” (zero-sum or positive-sum?)
- Consider what others will do in response to your move
- In repeated interactions, reputation and trust matter more than in one-shot games
- Change the game (rules, incentives, information) if you don’t like the equilibrium