Game Theory

Game Theory is a mathematical framework for analyzing strategic interactions among rational decision-makers. It provides tools for understanding how individuals or groups make decisions when their outcomes depend not only on their own actions but also on the actions of others. Game Theory is widely applied in Economics, political science, psychology, and biology.

Examples of Game Theory include:

• The Prisoner’s Dilemma: Two criminals are arrested and interrogated separately. If both remain silent, they each get a light sentence. If one betrays the other while the other remains silent, the betrayer goes free, and the silent one gets a heavy sentence. If both betray each other, they both receive moderate sentences. The dilemma illustrates the conflict between individual rationality and mutual benefit.
• The Nash Equilibrium: A situation where no player can benefit by changing their strategy while the other players keep theirs unchanged. For example, in a market with two competing businesses, both may choose a pricing strategy that maximizes their profits given the pricing of their competitor. If both are at a Nash Equilibrium, neither will change their pricing strategy unilaterally.
• The Battle of the Sexes: A couple wants to go out together but has different preferences for where to go. They must choose a destination without communication. The challenge is to coordinate their choices to maximize their enjoyment, highlighting the importance of cooperation and compromise in decision-making.