The last time I was at the airport, I stood at security for about five minutes, deciding which line would be faster. Last week, the same thing happened at the grocery store. This is an example of Game theory in my daily life, and I’m sure in yours, too! Game theory is a powerful analytical tool used to understand and predict the strategic interactions between individuals or groups, where each participant's choices affect the outcomes for others. From simple decisions like choosing a checkout line to complex dynamics like negotiating or competing in business, game theory provides insights into how people make decisions, anticipate others' actions, and optimise strategies for the best possible outcomes.
So now, let’s dig a little deeper into the mathematical framework for analysing these interactions in which multiple people are making decisions, all of which will affect each other. There are four key terms and concepts one needs to know: players (decision-makers), strategies (choices available), payoffs (results of choices), and equilibrium (stable outcomes. The fundamental concept in game theory is the Nash equilibrium. This occurs when each player in a game selects the best strategy they can, considering what the other players appear to be doing. In other words, at a Nash equilibrium, as long as the other players keep their strategies unchanged, no player can do better by changing their strategy independently. This means that everyone’s choices are balanced in a way that no one has an incentive to shift, making it a stable outcome where each player's decision is the best response to the decisions of others. Whilst that seemed very theoretical, this concept and strategy are widely used in various fields, including economics for market strategies, politics for negotiation tactics, and biology for understanding animal behaviour and evolutionary strategy.
Here are some well-known examples of game theory in social interactions to put these theoretical concepts to practical use! Now, first and probably the most famous, The Prisoners Dilemma. Imagine two colleagues, Anna and Sam, working on a crucial project with a tight deadline. They can either contribute fully to the project or slack off and do minimal work. Their actions have the following consequences:
If Both Contribute Fully, The project is completed successfully and on time, earning them praise and potential promotion. This is the best outcome for both.
If Anna contributes fully and Sam Slacks off, Anna will do most of the work while Sam will benefit from Anna’s efforts. Sam might receive the same recognition or reward without effort, creating an unfair advantage.
If Sam Contributes Fully and Anna Slacks Off, Sam does most of the work while Anna reaps the benefits, leading to a similar unfair situation as above but in reverse.
If Both Slack Off: The project fails or needs to be completed better, leading to a bad performance review for both, potentially jeopardising their jobs or future opportunities.
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