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Game Theory and Economics

Game theory is the study of human conflict and cooperation in a competitive environment. Game theory is the science of strategy of some sort or at least the most ideal decision-making of independent and competing actors in a strategic setting. Game theory was invented by John von Neumann and Oskar Morgenstern.

Game Theory In-Depth

Game theory creates a structure of analysis for making decisions based on logic in competitive environments. The term “game” may be misleading but it just means the theory applies to any interactive situation in which individual actors share more-or-less formal rules and consequences.

Formal utilization of game theory requires knowledge on several factors: the identity of independent actors, their preferences, what they know, which strategic acts they are allowed to make and how the decisions of the actors affect the result of the game. Other assumptions and factors may come into play depending on the model. It is to be assumed that the actors are all rational.

Despite the fact that game theory has a wide array of applications game theory is still a young and developing science with a long way to go.

Effect on Economics

Game theory revolutionized economics by dealing with some of the biggest problems in mathematical economics before it. For instance, neoclassical economics found it difficult to discern entrepreneurial anticipation and could not handle imperfect competition. With game theory the attention shifted from steady-state equilibrium into market process.

In game theory, the ones who made the decision must anticipate the reaction of those affected by their decision. For businesses, they must anticipate how rivals, employees, customers and investors react to their decisions.