A Game is a situation in which one person’s payoff is affected by the actions other players take. Most simply, you and I are in a game if what you do affects what I get.
Game theory is a tool that’s used to “map out” particular situations and figure out what is likely to happen under different scenarios. In the example above, I want you to do what’s best for me. However, you’re more likely to do what’s best for you. Knowing what’s best for you will help me understand what you are likely to do. This knowledge enables me to tailor my actions to yours so I can maximize my eventual payoff.
More specifically, the use of game theory forces analysts to better understand the dynamics of a situation:
- What each of the players cares about,
- Which options (actions) are available to each player,
- How other players’ actions affect each player’s payoffs, and
- Which actions each of the players are more likely to take under different circumstances.
Perhaps most importantly, the use of game theory also helps analysts understand how they might change the environment so as to encourage more favorable outcomes.
In some cases, game theory is employed by means of modeling situations using mathematical equations. In these cases, the equations can be used either to solve for optimal solutions and/or to generate simulations to see how the situation plays out under different scenarios.
However, game theory can also be employed using less rigorous methods. Most situations can be mapped out visually and textually, and then one can use those mappings to better understand situations and draw conclusions.