Game theory is the study of the structure and the rational strategies for performing in games or gamelike human interactions.
A key concept of game theory is the Nash Equilibrim. If all players have chosen a strategy and no player can benefit from changing their strategy unless other players also change their strategy, we are in a Nash equilibrium.
As an illustration, consider the problem known as “the prisoner’s dilemma.” Two suspects face imprisonment, but can get a reduced sentence by betraying each other. However, if neither of them betrays each other, they get a shorter sentence than if both do.
Conditional on both prisoners’ expected utility functions being such that they each gain utility from getting a shorter prison sentence, but not from the other prisoner getting a shorter prison sentence, both defecting is a Nash equilibrium, even though that is worse for both than both cooperating.
One real-world analogy to the prisoner’s dilemma is climate change mitigation, where it may not be rational for countries to reduce their carbon emissions if they cannot ensure that other countries will as well. Such cases illustrate the usefulness of group decision-making procedures.
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