Introducing Game Theory: A Graphic Guide (Graphic Guides)

by Ivan Pastine

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. In these cases, people’s actions are influenced by their expectations of others’ actions.

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.

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.

The belief that there will be a bank run is a self-fulfilling expectation: the expectation itself causes the bank run.