What's Game Theory?

Game Theory is a branch of Mathematics used in the social sciences, most notably in economics, as well as in evolutionary biology, ecology, engineering, political science, international relations, computer science, and philosophy. Game theory attempts to mathematically capture behavior in strategic situations in which an individual's success in making choices depends on the choices of others.

While initially developed to analyze competitions in which one individual does better at another's expense (zero sum games), it has been expanded to treat a wide class of interactions. Today, "game theory is a sort of umbrella or 'unified field' theory for the rational side of social science, where 'social' is interpreted broadly to include human as well as non-human players (computers, animals, plants)" (Yisrael Aumann 1987, Nobel Laureate in Economics 2005).

A classical example of a game is a market with vendors and buyers; the vendors set prices and try to sell their merchandise, while the buyers decide what to buy, from who to buy and how much to pay. Game theory can be used to predict the prices of the various products as a function of supply and demand, and the relation between price and demand.

Another example is an auction, where each participant chooses a bid, and the object that is sold to the participant who made the highest bid. Game theory tries to predict the bids that participants will submit, the expected revenue to the seller, and how this revenue is affected by the auctioning method.

In recent years governmental agencies worldwide have hired game theorists to design auctioning methods that will yield high revenue, and, when the selling price is high, some of the participants have hired game theorists to help in finding the bid that will maximize the probability of putting in the winning bid while keeping the cost low.

A third example is an election, where a group of voters has to decide on an agreed upon alternative (as in the political arena), or on a ranking of all alternatives (as in some sport matches). Game theory tries to develop 'fair ways' to transform the individual ranking of voters to a single choice or ranking of the whole group.*

*Adapted from Wikipedia