Game theory is the study of how logical decision makers interact and strategize, particularly in regards to humans, animals, and computers. Although it refers to interactions as games, and the people/animals/computers as players, it can be broadly applied. While originally only addressing mixed-strategy, two-person, zero-sum games (where the “game players” gains and losses are balanced by those of the other players), it has evolved in the present day to include a large range of interdisciplinary studies, such as social science and computer science, as well as expanding beyond two-person games. John von Neumann was one of the first people to discuss game theory and mixed strategy. He wrote a book with Oskar Morgenstern called Theory of Games and Economic Behavior. This book is considered to be the creation of the interdisciplinary field of Game theory, and von Neumann and Morgenstern theorized that probabilities could be used to derive expected utility. Game theorist John Nash later expanded on their theory and proved that in all non-cooperative games with a finite ending there is a Nash equilibrium. The Nash equilibrium is a stable state where no advantage can be found by one person changing their strategy unless the other person changes their strategy as well. Further studies and uses have expanded on game theory since then.
Game theory is concerned with multiple forms and types of games, and how interactions vary within each type. In cooperative games, players are able to form alliances that are enforced, whereas noncooperative games do not allow for alliances or rely on self-enforcement. Extensive form games have a specific time sequence of moves, called game trees, or games that allow for simultaneous moves between players. For zero-sum games, all of the advantages of winning go to a single player, and non-zero sum games allow for more than one person to win something based on the outcomes of the game. A famous example of a non-zero sum game is the prisoner’s dilemma, where there are multiple outcomes that benefit and hinder each player in different ways. No matter the type of game, the goal of game theory is to find the dominant strategy, where one player’s strategy is better that the others, no matter what their opponents do.
Rather than just focusing on games and how they are played, game theory allows predictions and understanding around how rational decision makers behave. This means that they can be applied in a variety of ways. Multiple papers published by the Princeton University Press discuss the role of game theory in economics. When applying game theory to businesses and organizations, it is also important to consider utility functions, which describes aspects outside of monetary value that affect player’s choices, such as personal preference.
Game theoretical outcomes can be further applied by organizations and businesses in:
- Product pricing: When considering sales pricing, businesses will often utilize game theory. The two players considered are the business and the consumer, and businesses will try to figure out what strategic interaction, such as which items to put on sale and at what price, will best entice customers.
- Project management: Game theory can be used to help plan a project by identifying the different steps and their likely outcomes. It can also help anticipate how team members might interact during different stages of a project, so that organizations can have support structures in place to ensure a productive work environment.