Game theory, a branch of applied mathematics, has its origins in parlor games, but is widely used today in many disciplines such as economics and computer science.
It is the systematic study of any rule-governed situation, where the outcome depends on the actions of multiple people. Examples range from simple games like Tic-Tac-Toe and Rock, Paper, Scissors all the way to mega-companies like Coke and Pepsi competing to sell their products.
It can cover the gamut from siblings fighting over a slice of pizza to nations engaging in brinksmanship over military strategies. Typically, game theory assumes the players only wish to maximize their own satisfaction and are also smart enough to do so.
Many aspects of game theory are demonstrated in a famous example known as the Prisoner’s Dilemma. Here is the story behind Prisoner’s Dilemma: Two gang members suspected of a major crime are being questioned separately by the police. If neither of them confesses, the police only have enough evidence for a small charge carrying a 2-year prison sentence. If both confess, they will each get a 10-year sentence. Ideally, they should both keep quiet and get the smallest sentence possible. But here comes the complication. If one of them confesses, that prisoner can get immunity as a witness and gets no prison time, while the other person will get a 20-year sentence. This little deal changes everything.
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How will the two prisoners decide? Prisoner 1 wonders: If the other prisoner plans to confess, what should I do? I should confess: Otherwise the other prisoner who plans to confess will get immunity, and I will get the 20-year sentence. Now suppose Prisoner 2 is not going to confess, what should I do? Again, I should confess because then I get immunity with no prison time. Regardless of Prisoner 2’s decision, I should confess. In this clever little scenario set up by the police, both are likely to confess and will therefore each get 10 years in prison. In fact, this little story has even made its way into Hollywood, most famously in the movie “Murder by Numbers.”
This game can be used to understand things as diverse as the Cold War, climate change and how the cosmetics industry thrives. Let’s look at climate change, which often requires investment in costly technology.
Every country would like other countries to invest to address climate change, without having to make expensive investments itself. Unfortunately, since most countries reason exactly like this, climate change remains unaddressed.
The beauty industry uses similar logic to sell more products: A person may think, “If I don’t use this facial moisturizer, everyone else will, and they will look better.”
And a version of Prisoner’s Dilemma can explain two superpowers’ strategy during the Cold War. If the Soviet Union was stockpiling nuclear weapons, then the U.S. would have to keep pace. Unfortunately, both countries reasoned the same way and ended up with a hoard of nuclear weapons, utilizing resources that could have been better spent elsewhere.
The key insight from Prisoner’s Dilemma is that in many instances there is a conflict between what is good for society and what is good for the individual. Any basic course in game theory will teach you how to convert many everyday life situations into games to find your best strategy.
Since corporations and government institutions employ people who are experts at game theory, knowing how it drives decisions has become an essential life skill. After all, if you pause and look around, you’ll soon realize you’ve been playing such games whether you knew it or not.