Game Theory

Game theory is a model of decision making and strategy under differing conditions of uncertainty. Games are defined as strategic interactions between players, where strategy refers to a complete plan of action including all prospective play options as well as the player's associated outcome preferences. The formal predicted strategy for solving a game is referred to as a solution. The purpose of game theory is to explore differing solutions (i.e., tactics) among players within games of strategy that obtain a maximum of utility. In game theory parlance, “utility” refers to preferred outcomes that may vary among individual players. John von Neumann and Oskar Morgenstern seeded game theory as an economic explanatory construct for all endeavors of the individual to achieve maximum utility or, in economic terms, profit; this is referred to as a maximum. Since its inception in 1944, game theory has become an accepted multidisciplinary model for social exchange in decision making within the spheres of biology, sociology, political science, business, and psychology. The discipline of psychology has embraced applied game theory as a model for conflict resolution between couples, within families, and between hostile countries; as such, it is also referred to as the theory of social situations.

Classic game theory as proposed by von Neumann and Morgenstern is a mathematical model founded in utility theory, wherein the game player's imagined outcome preferences can be combined and weighted by their probabilities. These outcome preferences can be quantified and are therefore labeled utilities. A fundamental assumption of von Neumann and Morgenstern's game theory is that the game player or decision maker has clear preferences and expectations. Each player is presumed rational in his or her choice behavior, applying logical heuristics in weighing all choice options, thereby formulating [Page 524]his or her game strategy in an attempt to optimize the outcome by solving for the maximum. These game strategies may or may not be effective in solving for the maximum; however, the reasoning in finding a solution must be sound.

Game Context

Three important contextual qualities of a game involve whether the game is competitive or non-competitive, the number of players involved in the game, and the degree to which all prior actions are known.

Games may be either among individuals, wherein they are referred to as competitive games, or between groups of individuals, typically characterized as noncompetitive games. The bulk of game theory focuses on competitive games of conflict. The second contextual quality of a game involves player or group number. Although there are situations in which a single decision maker must choose an optimal solution without reference to other game players (i.e., human against nature), generally, games are between two or more players. Games of two players or groups of players are referred to as two-person or two-player (where “player” may reflect a single individual or a single group of individuals) games; these kinds of games are models of social exchange. In a single-person model, the decision maker controls all variables in a given problem; the challenge in finding an optimal outcome (i.e., maximum) is in the number of variables and the nature of the function to be maximized. In contrast, in two-person, two-player or n-person, n-player games (where “n” is the actual number of persons or groups greater than two), the challenge of optimization hinges on the fact that each participant is part of a social exchange, where each player's outcome is interdependent on the actions of all other players. The variables in a social exchange economy are the weighted actions of all other game players.

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