Game theory is a method of studying decision-making situations in which the choices of two or more individuals or groups influence one another. Game theorists refer to these situations as games and to the decision makers as players. An example of such a situation is one in which the decision of each of several countries about whether to acquire nuclear weapons is affected by the decisions of the other countries. Game theory has become important in such fields as economics, international relations, moral philosophy, political science, social psychology, and sociology. Its roots are generally traced back to the book The Theory of Games and Economic Behavior (1944), by Hungarian-born mathematician John von Neumann and Austrian economist Oskar Morgenstern.
Game theorists have identified many types of games. In zero-sum games, the players have opposite interests. In nonzero-sum games, also called mixed-motive games, they have some interests in common. When the players can agree on a plan of action, they are in a cooperative game. In a noncooperative game, the players cannot coordinate their choices. Coordination may be impossible if the players cannot communicate, if no institution exists to enforce an agreement, or if coordination is forbidden by law, as in the case of antitrust laws.
Game theory’s most famous game is called Prisoner’s Dilemma, a noncooperative game that involves the following imaginary situation: The police arrest two suspects and keep them isolated from each other. Each prisoner is told that if only one of them confesses, the one who confesses will go free but the one who remains silent will receive a severe sentence. They are also told that if they both confess, each will receive a moderate sentence, and if neither confesses, each will receive an even milder sentence. Under these conditions, each prisoner is better off confessing no matter what the other one does. Yet by pursuing their own advantage and confessing, both get harsher sentences than they would have received if they had trusted each other and kept quiet.
Prisoner’s Dilemma highlights and summarizes a conflict between individual and group interests that lies at the heart of many important real-life situations. For example, when farmers maximize their production, prices fall and all the farmers suffer. Collectively, the farmers would be better off restricting the amount they plant. Nonetheless, it is to each farmer’s individual advantage to plant as much as possible. Decisions about paying taxes, protecting the environment, or acquiring nuclear weapons may also reflect this tension between what is good for the decision maker and what is good for the group.