Game Theory

Definition

Game theory is an economic concept that analyzes strategic decision-making in situations where the outcome of one person's actions depends on the actions taken by others. It helps predict how individuals or firms will behave in competitive situations.

Analogy

Think of game theory as playing chess. You need to think several moves ahead, anticipate your opponent's moves, and strategize accordingly to maximize your chances of winning.

Related terms

Nash Equilibrium: A situation in game theory where each player has chosen their best strategy given what other players are doing, resulting in a stable outcome.

Prisoner's Dilemma: A classic example in game theory where two individuals face a choice between cooperating for mutual benefit or betraying each other for personal gain.

Dominant Strategy: In game theory, it refers to the best course of action for an individual regardless of what choices others make.