Introducing Game Theory: A Graphic Guide (Graphic Guides)

by Ivan Pastine

Game theory is a set of tools used to help analyze situations where an individual’s best course of action depends on what others do or are expected to do. Game theory allows us to understand how people act in situations where they are interconnected.

Depends on inputs of other. Their choices may not be rational to thwart you

Sometimes through cooperation with others we can achieve more than we can on our own. Other times conflict arises where an individual benefits at the expense of others.

In computer science, networked computers compete for bandwidth.

Game theory is useful whenever there is strategic interaction, whenever how well you do depends on the actions of others as well as your own choices.

Game theory is the study of strategic interaction. Strategic interaction is also the key element of most board games, which is where it gets its name. Your decision affects the other player’s actions and vice versa. Much of the jargon of game theory is borrowed directly from games. The decision makers are called players. Players make a move when they make a decision.

There are a limited number of options in each move. Yet the complexity of the game is daunting even though it is much simpler than even the most basic human interaction.

One feature of complex board games like chess is that the more skilled the players are, the more frequently the game ends with a

backward induction: you can figure out your opponent’s response to your possible actions and take that into consideration before making your own move.

Once players learn to reason via backward induction, all noughts & crosses games are likely to end in a draw.

The primary concern of game theory is not board games like chess. Rather, its aim is to improve our understanding of interactions between people, companies, countries, animals, etc., when the actual problems are too complex to fully understand.

Common knowledge of rationality requires that we are able to continue this chain of knowledge indefinitely.

Human behaviour is probably better approximated by bounded rationality. That is, human rationality is limited by the tractability of the decision problem (how easy it is to manage), the cognitive limitations of our minds, the time available in which to make the decision, and how important the decision is to us.

The idea of Nash equilibrium is both simple and powerful: in equilibrium each rational player chooses his or her best response to the choice of the other player. That is, he or she chooses the best action given what the other player is doing.