basically the title I’ve always wondered how it is economics
In: Economics
Game theory is mostly commonly known by something called The Prisoners Dilemma. It discusses social choice from a mathematical perspective
Let’s play.
I will be player A. [This guy](https://www.reddit.com/r/explainlikeimfive/s/UGMqHfcGA2) will be player B (that’s you, u/buffinita)
The reward will be lots of upvotes
My first move is to say that player B’s explanation is wrong, and mine is the only correct one
Game theory uses math to figure out the likely outcomes of two “rational” people interacting with each other.
If you have two fast food businesses; how might one try to gain an edge over the other; then once that first move is made what might the reaction be of the other
Game theory tries to use math to define strategy and how people react to other people’s strategies.
For example, your school teacher asks everyone in your class of 4 students to pick a number from 1 to 10. You can pick any number you want and you will get that many candies divided by the number of people that picked that number.
Your instinct is to pick 10, the highest number, but you know that the other students also want the highest number of candies, and if you all pick 10 you get fewer candies than if you had picked 4 and nobody else had picked 4. However, all students can think this way and you can then assume that nobody is likely to pick 10.
The math that formally defines these outcomes and the optimal strategy given other’s strategies is game theory.
An example I can give you in economics is that if it was possible to know the true value of a stock, nobody would trade it because the buyer would not buy it unless it’s being sold below it’s true value, but the seller knowing this would never sell it below it’s value, and vice versa.
It’s a mathematical theory (i.e. an area of maths) that describes situations in which you have a set of players who choose from a set of strategies and receive payoffs based on their strategies and those of the other players. It’s pretty broad: you can study games in which two players each choose between two strategies or games in which infinite sets of players choose from infinite sets of strategies. You can study zero-sum games in which any gain for one player necessarily means a loss for another player, or you can study games in which players can find win-win (or lose-lose) outcomes. You can study a situation in which intelligent players play a single game and want to ensure they will get the least-worst payoff even if everyone else picks the decisions that will hurt them the most (this is what leads to ideas like the Nash equilibrium). Or you can study a situation in which players repeatedly play each other and can learn from each other or punish each other for choices they have made in past games. Or you can study a situation in which players can cooperate and plan their strategies together.
I certainly wouldn’t say that “it is economics”, but it has applications in various areas of economics, and the early work in the field was mostly inspired by economics. Large swathes of economics are about situations in which people (or businesses) choose strategies to try and make the biggest profits, with the profits depending on their own strategies and those chosen by others.
It also has applications in evolutionary biology, sociology, psychology, computer science, political science, military theory, philosophy, etc., not to mention in actual games. Lots of people from different fields are interested in the idea of making strategic choices, or at least ideas that are closely analogous. In evolutionary biology, the “strategies” are evolutionary traits and the “payoff” is evolutionary fitness, i.e. the likelihood of surviving and reproducing. In psychology, you might be interested in studying how real humans make strategic decisions. In philosophy, you might be interested in views about how people *should* make strategic decisions. In computer science, you might want to study how different nodes in a network can make decisions to ensure a positive outcome for the network as a whole.
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