What Exactly Is Game Theory?

There are three parts to any game:

• A set of players

• Moves the players can make

• Payoffs the players might receive

The players choose their moves to maximize their payoff. Each player always assumes that other players are also trying to maximize their score.

Game theory gets interesting, however, only when there is tactical interaction, that is, when everyone tries to figure out their rivals’ strategy before they move. Football (American or European) could be analyzed using game theory because the players try to determine their opponents’ strategy before making their move. Bowling and golf are not interesting to game theorists because although players compete in these sports, they mostly ignore their competitors when formulating their moves because they have no control over how their competitor might play.

Mathematics dominates much of formal game theory. In an attempt to maximize this author’s book royalties, however, Game Theory at Work keeps the math to a minimum. Fortunately, you can learn most of the practical applications of game theory without using any math more complicated than addition and subtraction. This book does, however, contain many figures and diagrams, and if you skip them you will learn little.

In game theory land people always act in their own self-interest, and consequently everyone lies whenever lying serves their interests. So, how can you make your threat or promise believable when your word is worthless? Chapter 2 considers the credibility of threats and promises.