GT

Intro. #1

1. Game theory is the study of the ways in which strategic interactions among rational players produce outcomes with respect to the preferences (or utilities) of those players, none of which might have been intended by any of them.

2. Interaction: If all agents have optimal actions regardless of what the others do, we can model this without appeal to game theory; otherwise, we need it.

3. Rationality: We assume that players can (i) assess outcomes; (ii) calculate paths to outcomes; and (iii) choose actions that yield their most-preferred outcomes, given the actions of the other players.

4. `Rational’ does not mean anything else. In particular, it doesn’t mean: (i) moral; (ii) sensible; (iii) self-conscious about one’s plans and reasons.

5. An agent is any rational entity. So the following are all examples of agents: (i) a (sane) person; (ii) a firm; (iii) a non-human animal; (iv) a plant; (v) a labour union; (vi) a brain cell … and many others. Examples of non-agents: rocks, cars, buildings, planets, houses.

6. Preferences are agents’ rankings of possible states of the world. Sometimes agents know their own preferences. Often they never think about them; they just reveal them in the choices they make. (How do we know lions prefer catching zebras to going hungry?)

GT

Intro. #2

The mathematical theory of games was invented by John von Neumann and Oskar Morgenstern (1944). Initially, it could only be applied to zero-sum situations – cases where one agent’s gain is exactly another’s loss. Interesting economic situations aren’t like this. Thanks to work by two generations of pioneers (Nash, Selten, Aumann, Harsanyi, Maynard Smith), by the late 1970s game theory had been developed to the point where it became the main mathematical technology in economics.

Why is game theory so important? Without it, one can study only two types of markets:

(1) Single-agent markets, such as monopolistic ones. Here, there is no interaction.

(2) Perfectly competitive (or general-equilibrium) markets. Here, there are so many players that no single agent’s strategy can influence the outcome. Interaction is thus irrelevant.

This is fine for analysis of commodity markets – and not much else. This is why game theory is sweeping economics.

Other fields of application:

- Politics. Most electoral and administrative strategies pursued by politicians would be incomprehensible without game-theoretic insight.

- Behavioral sciences. Dynamic, or `evolutionary’ game theory is now the foundation for all of the so-called `behavioural’ (i.e., social, psychological and biological) sciences.