Game Theory

Game theory is a theoretical investigation of the optimal strategies of rational actors in interactions marked by conflict. It attempts to identify optimal strategies for all the parties involved, given their counterparts’ strategies. Game theory’s theoretical domain is neither descriptive nor normative; it neither describes ordinary people’s actions nor tells them what to do. Rather, it is analytic: it analyses the formal implications of various levels of mutual rationality in strategic situations. Theoretical game theory analyses limited problems in specifically bounded domains and solves them mathematically. Its emphasis on strategy makes game theory a natural choice for testable applications in strategy research. The field of game theory asks the following question across a variety of contexts: ‘What would someone who is rational and profit-maximizing do in this situation?’ Game theory also investigates what a second rational and profit-maximizing person or party should do in anticipation of and/or in reply to this question. In particular, it attempts to identify optimal strategies for all the parties, given others’ strategies. Game theory has made and is making remarkable advances, in no small part because theorists and empiricists have begun to effectively exchange information to their mutual advantage.