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Game Theory

Game Theory Meaning:
Examines the behavior of individuals in ‘strategic situations,’ where their success depends on both their choices and on the choices of others. Game theory tries to model and predict the behavior of the individuals mathematically. It is used in various disciplines, but most notably economics and international relations.

Game Theory Example:
A classic strategic situation that game theory examines is known as the prisoner’s dilemma. This situation imagines two individuals who have been arrested for a crime they both committed. They are each given the option of betraying the other or staying silent. If both individuals stay silent then they both go free, if only one betrays the other then the betrayer goes free and but the betrayed goes to jail for 10 years, and if both betray each other then both go to jail for 5 years. Game theory predicts that both individuals will choose to betray the other, even though that means both will suffer a penalty.