Game theory

Economics
Economies by country
General classifications
Microeconomics Macroeconomics History of economic thought Methodology Heterodox approaches
Technical methods
Mathematical Econometrics Experimental National accounting
Fields and subfields
Behavioural Cultural Evolutionary Growth Development History International Economic systems Monetary and Financial economics Public and Welfare economics Health Education Welfare Population Labour Personnel Managerial Computational Business Information Game theory Industrial organization Law Agricultural Natural resource Environmental Ecological Urban Rural Regional Geography Expeditionary
Lists
Economists Journals Publications Categories Index Outline
Business and economics portal

Game theory is included in the JEL classification codes: JEL: C7

Game theory is a study of strategic decision making. More formally, it is "the study of mathematical models of conflict and cooperation between intelligent rational decision-makers." An alternative term suggested "as a more descriptive name for the discipline" is interactive decision theory. Game theory is mainly used in economics, political science, and psychology, as well as logic and biology. The subject first addressed zero-sum games, such that one person's gains exactly equal net losses of the other participant(s). Today, however, game theory applies to a wide range of class relations, and has developed into an umbrella term for the logical side of science, to include both human and non-humans, like computers. Classic uses include a sense of balance in numerous games, where each person has found or developed a tactic that cannot successfully better his results, given the other approach.

Modern game theory began with the idea regarding the existence of mixed-strategy equilibria in two-person zero-sum games and its proof by John von Neumann. Von Neumann's original proof used Brouwer's fixed-point theorem on continuous mappings into compact convex sets, which became a standard method in game theory and mathematical economics. His paper was followed by his 1944 book Theory of Games and Economic Behaviour, with Oskar Morgenstern, which considered cooperative games of several players. The second edition of this book provided an axiomatic theory of expected utility, which allowed mathematical statisticians and economists to treat decision-making under uncertainty.

This theory was developed extensively in the 1950s by many scholars. Game theory was later explicitly applied to biology in the 1970s, although similar developments go back at least as far as the 1930s. Game theory has been widely recognized as an important tool in many fields. Eight game-theorists have won the Nobel Memorial Prize in Economic Sciences, and John Maynard Smith was awarded the Crafoord Prize for his application of game theory to biology.

Representation of games

The games studied in game theory are well-defined mathematical objects. A game consists of a set of players, a set of moves (or strategies) available to those players, and a specification of payoffs for each combination of strategies. Most cooperative games are presented in the characteristic function form, while the extensive and the normal forms are used to define noncooperative games.

Extensive form

The extensive form can be used to formalize games with a time sequencing of moves. Games here are played on trees (as pictured to the left). Here each vertex (or node) represents a point of choice for a player. The player is specified by a number listed by the vertex. The lines out of the vertex represent a possible action for that player. The payoffs are specified at the bottom of the tree. The extensive form can be viewed as a multi-player generalization of a decision tree. (Fudenberg & Tirole 1991, p. 67)

In the game pictured to the left, there are two players. Player 1 moves first and chooses either F or U. Player 2 sees Player 1's move and then chooses A or R. Suppose that Player 1 chooses U and then Player 2 chooses A, then Player 1 gets 8 and Player 2 gets 2.

The extensive form can also capture simultaneous-move games and games with imperfect information. To represent it, either a dotted line connects different vertices to represent them as being part of the same information set (i.e., the players do not know at which point they are), or a closed line is drawn around them. (See example in the imperfect information section.)

Normal form

	Player 2 chooses Left	Player 2 chooses Right
Player 1 chooses Up	4, 3	–1, –1
Player 1 chooses Down	0, 0	3, 4
Normal form or payoff matrix of a 2-player, 2-strategy game

The normal (or strategic form) game is usually represented by a matrix which shows the players, strategies, and pay-offs (see the example to the right). More generally it can be represented by any function that associates a payoff for each player with every possible combination of actions. In the accompanying example there are two players; one chooses the row and the other chooses the column. Each player has two strategies, which are specified by the number of rows and the number of columns. The payoffs are provided in the interior. The first number is the payoff received by the row player (Player 1 in our example); the second is the payoff for the column player (Player 2 in our example). Suppose that Player 1 plays Up and that Player 2 plays Left. Then Player 1 gets a payoff of 4, and Player 2 gets 3.

When a game is presented in normal form, it is presumed that each player acts simultaneously or, at least, without knowing the actions of the other. If players have some information about the choices of other players, the game is usually presented in extensive form.

Every extensive-form game has an equivalent normal-form game, however the transformation to normal form may result in an exponential blowup in the size of the representation, making it computationally impractical. (Leyton-Brown & Shoham 2008, p. 35)

Characteristic function form

In games that possess removable utility separate rewards are not given; rather, the characteristic function decides the payoff of each unity. The idea is that the unity that is 'empty', so to speak, does not receive a reward at all.

The origin of this form is to be found in John von Neumann and Oskar Morgenstern's book; when looking at these instances, they guessed that when a union appears, it works against the fraction as if two individuals were playing a normal game. The balanced payoff of C is a basic function. Although there are differing examples that help determine coalitional amounts from normal games, not all appear that in their function form can be derived from such.

Formally, a characteristic function is seen as: (N,v), where N represents the group of people and is a normal utility.

Such characteristic functions have expanded to describe games where there is no removable utility.

Partition function form

The characteristic function form ignores the possible externalities of coalition formation. In the partition function form the payoff of a coalition depends not only on its members, but also on the way the rest of the players are partitioned (Thrall & Lucas 1963).

General and applied uses

As a method of applied mathematics, game theory has been used to study a wide variety of human and animal behaviors. It was initially developed in economics to understand a large collection of economic behaviors, including behaviors of firms, markets, and consumers. The use of game theory in the social sciences has expanded, and game theory has been applied to political, sociological, and psychological behaviors as well.

Game-theoretic analysis was initially used to study animal behaviour by Ronald Fisher in the 1930s (although even Charles Darwin makes a few informal game-theoretic statements). This work predates the name "game theory", but it shares many important features with this field. The developments in economics were later applied to biology largely by John Maynard Smith in his book Evolution and the Theory of Games.

In addition to being used to describe, predict, and explain behavior, game theory has also been used to develop theories of ethical or normative behaviour and to prescribe such behaviour. In economics and philosophy, scholars have applied game theory to help in the understanding of good or proper behaviour. Game-theoretic arguments of this type can be found as far back as Plato.

Description and modeling

The first known use is to describe and model how human populations behave. Some scholars believe that by finding the equilibria of games they can predict how actual human populations will behave when confronted with situations analogous to the game being studied. This particular view of game theory has come under recent criticism. First, it is criticized because the assumptions made by game theorists are often violated. Game theorists may assume players always act in a way to directly maximize their wins (the Homo economicus model), but in practice, human behaviour often deviates from this model. Explanations of this phenomenon are many; irrationality, new models of deliberation, or even different motives (like that of altruism). Game theorists respond by comparing their assumptions to those used in physics. Thus while their assumptions do not always hold, they can treat game theory as a reasonable scientific ideal akin to the models used by physicists. However, in the centipede game, guess 2/3 of the average game, and the dictator game, people regularly do not play Nash equilibria. These experiments have demonstrated that individuals do not play equilibrium strategies. There is an ongoing debate regarding the importance of these experiments.

Alternatively, some authors claim that Nash equilibria do not provide predictions for human populations, but rather provide an explanation for why populations that play Nash equilibria remain in that state. However, the question of how populations reach those points remains open.

Some game theorists have turned to evolutionary game theory in order to resolve these issues. These models presume either no rationality or bounded rationality on the part of players. Despite the name, evolutionary game theory does not necessarily presume natural selection in the biological sense. Evolutionary game theory includes both biological as well as cultural evolution and also models of individual learning (for example, fictitious play dynamics).

Prescriptive or normative analysis

	Cooperate	Defect
Cooperate	-1, -1	-10, 0
Defect	0, -10	-5, -5
The Prisoner's Dilemma

On the other hand, some scholars see game theory not as a predictive tool for the behaviour of human beings, but as a suggestion for how people ought to behave. Since a strategy, corresponding to a Nash equilibrium of a game constitutes one's best response to the actions of the other players - provided they are in (the same) Nash equilibrium -, playing a strategy that is part of a Nash equilibrium seems appropriate. However, the rationality of such a decision has been proved only for special cases. This normative use of game theory has also come under criticism. First, in some cases it is appropriate to play a non-equilibrium strategy if one expects others to play non-equilibrium strategies as well. For an example, see guess 2/3 of the average.

Second, the prisoner's dilemma presents another potential counterexample. In the prisoner's dilemma, each player pursuing his own self-interest leads both players to be worse off than had they not pursued their own self-interests.

Economics and business

Game theory is a major method used in mathematical economics and business for modeling competing behaviors of interacting agents. Applications include a wide array of economic phenomena and approaches, such as auctions, bargaining, mergers & acquisitions pricing, fair division, duopolies, oligopolies, social network formation, agent-based computational economics, general equilibrium, mechanism design, and voting systems, and across such broad areas as experimental economics, behavioural economics, information economics, industrial organization, and political economy.

This research usually focuses on particular sets of strategies known as equilibria in games. These "solution concepts" are usually based on what is required by norms of rationality. In non-cooperative games, the most famous of these is the Nash equilibrium. A set of strategies is a Nash equilibrium if each represents a best response to the other strategies. So, if all the players are playing the strategies in a Nash equilibrium, they have no unilateral incentive to deviate, since their strategy is the best they can do given what others are doing.

The payoffs of the game are generally taken to represent the utility of individual players. Often in modeling situations the payoffs represent money, which presumably corresponds to an individual's utility. This assumption, however, can be faulty.

A prototypical paper on game theory in economics begins by presenting a game that is an abstraction of a particular economic situation. One or more solution concepts are chosen, and the author demonstrates which strategy sets in the presented game are equilibria of the appropriate type. Naturally one might wonder to what use should this information be put. Economists and business professors suggest two primary uses (noted above): descriptive and prescriptive.

Political science

The application of game theory to political science is focused in the overlapping areas of fair division, political economy, public choice, war bargaining, positive political theory, and social choice theory. In each of these areas, researchers have developed game-theoretic models in which the players are often voters, states, special interest groups, and politicians.

For early examples of game theory applied to political science, see the work of Anthony Downs. In his book An Economic Theory of Democracy (Downs 1957), he applies the Hotelling firm location model to the political process. In the Downsian model, political candidates commit to ideologies on a one-dimensional policy space. Downs first shows how the political candidates will converge to the ideology preferred by the median voter if voters are fully informed, but then argues that voters choose to remain rationally ignorant which allows for candidate divergence.

A game-theoretic explanation for democratic peace is that public and open debate in democracies send clear and reliable information regarding their intentions to other states. In contrast, it is difficult to know the intentions of nondemocratic leaders, what effect concessions will have, and if promises will be kept. Thus there will be mistrust and unwillingness to make concessions if at least one of the parties in a dispute is a non-democracy (Levy & Razin 2003).

Biology

	Hawk	Dove
Hawk	20, 20	80, 40
Dove	40, 80	60, 60
The hawk-dove game

The payoffs for games in biology, unlike those in economics, are often interpreted as corresponding to fitness. In addition, the focus has been less on equilibria that correspond to a notion of rationality and more on ones that would be maintained by evolutionary forces. The best known equilibrium in biology is known as the evolutionarily stable strategy (or ESS), and was first introduced in (Smith & Price 1973). Although its initial motivation did not involve any of the mental requirements of the Nash equilibrium, every ESS is a Nash equilibrium.

In biology, game theory has been used to understand many different phenomena. It was first used to explain the evolution (and stability) of the approximate 1:1 sex ratios. (Fisher 1930) suggested that the 1:1 sex ratios are a result of evolutionary forces acting on individuals who could be seen as trying to maximize their number of grandchildren.

Additionally, biologists have used evolutionary game theory and the ESS to explain the emergence of animal communication (Harper & Maynard Smith 2003). The analysis of signaling games and other communication games has provided insight into the evolution of communication among animals. For example, the mobbing behavior of many species, in which a large number of prey animals attack a larger predator, seems to be an example of spontaneous emergent organization. Ants have also been shown to exhibit feed-forward behaviour akin to fashion, see Butterfly Economics.

Biologists have used the game of chicken to analyze fighting behaviour and territoriality.

Maynard Smith, in the preface to Evolution and the Theory of Games, writes, "paradoxically, it has turned out that game theory is more readily applied to biology than to the field of economic behaviour for which it was originally designed". Evolutionary game theory has been used to explain many seemingly incongruous phenomena in nature.

One such phenomenon is known as biological altruism. This is a situation in which an organism appears to act in a way that benefits other organisms and is detrimental to itself. This is distinct from traditional notions of altruism because such actions are not conscious, but appear to be evolutionary adaptations to increase overall fitness. Examples can be found in species ranging from vampire bats that regurgitate blood they have obtained from a night's hunting and give it to group members who have failed to feed, to worker bees that care for the queen bee for their entire lives and never mate, to Vervet monkeys that warn group members of a predator's approach, even when it endangers that individual's chance of survival. All of these actions increase the overall fitness of a group, but occur at a cost to the individual.

Evolutionary game theory explains this altruism with the idea of kin selection. Altruists discriminate between the individuals they help and favour relatives. Hamilton's rule explains the evolutionary reasoning behind this selection with the equation c

Computer science and logic

Game theory has come to play an increasingly important role in logic and in computer science. Several logical theories have a basis in game semantics. In addition, computer scientists have used games to model interactive computations. Also, game theory provides a theoretical basis to the field of multi-agent systems.

Separately, game theory has played a role in online algorithms. In particular, the k-server problem, which has in the past been referred to as games with moving costs and request-answer games (Ben David, Borodin & Karp et al. 1994). Yao's principle is a game-theoretic technique for proving lower bounds on the computational complexity of randomized algorithms, and especially of online algorithms.

The emergence of the internet has motivated the development of algorithms for finding equilibria in games, markets, computational auctions, peer-to-peer systems, and security and information markets. Algorithmic game theory and within it algorithmic mechanism design combine computational algorithm design and analysis of complex systems with economic theory.

Philosophy

	Stag	Hare
Stag	3, 3	0, 2
Hare	2, 0	2, 2
Stag hunt

Game theory has been put to several uses in philosophy. Responding to two papers by W.V.O. Quine (1960, 1967), Lewis (1969) used game theory to develop a philosophical account of convention. In so doing, he provided the first analysis of common knowledge and employed it in analyzing play in coordination games. In addition, he first suggested that one can understand meaning in terms of signaling games. This later suggestion has been pursued by several philosophers since Lewis (Skyrms (1996), Grim, Kokalis, and Alai-Tafti et al. (2004)). Following Lewis (1969) game-theoretic account of conventions, Edna Ullmann-Margalit (1977) and Bicchieri (2006) have developed theories of social norms that define them as Nash equilibria that result from transforming a mixed-motive game into a coordination game.

Game theory has also challenged philosophers to think in terms of interactive epistemology: what it means for a collective to have common beliefs or knowledge, and what are the consequences of this knowledge for the social outcomes resulting from agents' interactions. Philosophers who have worked in this area include Bicchieri (1989, 1993), Skyrms (1990), and Stalnaker (1999).

In ethics, some authors have attempted to pursue the project, begun by Thomas Hobbes, of deriving morality from self-interest. Since games like the prisoner's dilemma present an apparent conflict between morality and self-interest, explaining why cooperation is required by self-interest is an important component of this project. This general strategy is a component of the general social contract view in political philosophy (for examples, see Gauthier (1986) and Kavka (1986).

Other authors have attempted to use evolutionary game theory in order to explain the emergence of human attitudes about morality and corresponding animal behaviors. These authors look at several games including the prisoner's dilemma, stag hunt, and the Nash bargaining game as providing an explanation for the emergence of attitudes about morality (see, e.g., Skyrms (1996, 2004) and Sober and Wilson (1999)).

Some assumptions used in some parts of game theory have been challenged in philosophy; for example, psychological egoism states that rationality reduces to self-interest—a claim debated among philosophers. (see Psychological egoism#Criticisms)

Types of games

Cooperative or non-cooperative

A game is cooperative if the players are able to form binding commitments. For instance the legal system requires them to adhere to their promises. In noncooperative games this is not possible.

Often it is assumed that communication among players is allowed in cooperative games, but not in noncooperative ones. However, this classification on two binary criteria has been questioned, and sometimes rejected (Harsanyi 1974).

Of the two types of games, noncooperative games are able to model situations to the finest details, producing accurate results. Cooperative games focus on the game at large. Considerable efforts have been made to link the two approaches. The so-called Nash-programme has already established many of the cooperative solutions as noncooperative equilibria.

Hybrid games contain cooperative and non-cooperative elements. For instance, coalitions of players are formed in a cooperative game, but these play in a non-cooperative fashion.

Symmetric and asymmetric

	E	F
E	1, 2	0, 0
F	0, 0	1, 2
An asymmetric game

A symmetric game is a game where the payoffs for playing a particular strategy depend only on the other strategies employed, not on who is playing them. If the identities of the players can be changed without changing the payoff to the strategies, then a game is symmetric. Many of the commonly studied 2×2 games are symmetric. The standard representations of chicken, the prisoner's dilemma, and the stag hunt are all symmetric games. Some scholars would consider certain asymmetric games as examples of these games as well. However, the most common payoffs for each of these games are symmetric.

Most commonly studied asymmetric games are games where there are not identical strategy sets for both players. For instance, the ultimatum game and similarly the dictator game have different strategies for each player. It is possible, however, for a game to have identical strategies for both players, yet be asymmetric. For example, the game pictured to the right is asymmetric despite having identical strategy sets for both players.

Zero-sum and non-zero-sum

	A	B
A	–1, 1	3, –3
B	0, 0	–2, 2
A zero-sum game

Zero-sum games are a special case of constant-sum games, in which choices by players can neither increase nor decrease the available resources. In zero-sum games the total benefit to all players in the game, for every combination of strategies, always adds to zero (more informally, a player benefits only at the equal expense of others). Poker exemplifies a zero-sum game (ignoring the possibility of the house's cut), because one wins exactly the amount one's opponents lose. Other zero-sum games include matching pennies and most classical board games including Go and chess.

Many games studied by game theorists (including the infamous prisoner's dilemma) are non-zero-sum games, because the outcome has net results greater or less than zero. Informally, in non-zero-sum games, a gain by one player does not necessarily correspond with a loss by another.

Constant-sum games correspond to activities like theft and gambling, but not to the fundamental economic situation in which there are potential gains from trade. It is possible to transform any game into a (possibly asymmetric) zero-sum game by adding an additional dummy player (often called "the board"), whose losses compensate the players' net winnings.

Simultaneous and sequential

Simultaneous games are games where both players move simultaneously, or if they do not move simultaneously, the later players are unaware of the earlier players' actions (making them effectively simultaneous). Sequential games (or dynamic games) are games where later players have some knowledge about earlier actions. This need not be perfect information about every action of earlier players; it might be very little knowledge. For instance, a player may know that an earlier player did not perform one particular action, while he does not know which of the other available actions the first player actually performed.

The difference between simultaneous and sequential games is captured in the different representations discussed above. Often, normal form is used to represent simultaneous games, and extensive form is used to represent sequential ones. The transformation of extensive to normal form is one way, meaning that multiple extensive form games correspond to the same normal form. Consequently, notions of equilibrium for simultaneous games are insufficient for reasoning about sequential games; see subgame perfection.

In short, the differences between sequential and simultaneous games are as follows:

	Sequential	Simultaneous
Normally denoted by:	Decision Trees	Payoff Matrices
Prior knowledge of opponent's move:	Yes	No
Time Axis:	Yes	No
Also known as:	Extensive Game	Strategic Game

Perfect information and imperfect information

An important subset of sequential games consists of games of perfect information. A game is one of perfect information if all players know the moves previously made by all other players. Thus, only sequential games can be games of perfect information because players in simultaneous games do not know the actions of the other players. Most games studied in game theory are imperfect-information games. Interesting examples of perfect-information games include the ultimatum game and centipede game. Recreational games of perfect information games include chess, go, and mancala. Many card games are games of imperfect information, for instance poker or contract bridge.

Perfect information is often confused with complete information, which is a similar concept. Complete information requires that every player know the strategies and payoffs available to the other players but not necessarily the actions taken. Games of incomplete information can be reduced, however, to games of imperfect information by introducing " moves by nature" (Leyton-Brown & Shoham 2008, p. 60).

Combinatorial games

Games in which the difficulty of finding an optimal strategy stems from the multiplicity of possible moves are called combinatorial games. Examples include chess and go. Games that involve imperfect or incomplete information may also have a strong combinatorial character, for instance backgammon. There is no unified theory addressing combinatorial elements in games. There are, however, mathematical tools that can solve particular problems and answer general questions.

Games of perfect information have been studied in combinatorial game theory, which has developed novel representations, e.g. surreal numbers, as well as combinatorial and algebraic (and sometimes non-constructive) proof methods to solve games of certain types, including "loopy" games that may result in infinitely long sequences of moves. These methods address games with higher combinatorial complexity than those usually considered in traditional (or "economic") game theory. A typical game that has been solved this way is hex. A related field of study, drawing from computational complexity theory, is game complexity, which is concerned with estimating the computational difficulty of finding optimal strategies.

Research in artificial intelligence has addressed both perfect and imperfect (or incomplete) information games that have very complex combinatorial structures (like chess, go, or backgammon) for which no provable optimal strategies have been found. The practical solutions involve computational heuristics, like alpha-beta pruning or use of artificial neural networks trained by reinforcement learning, which make games more tractable in computing practice.

Infinitely long games

Games, as studied by economists and real-world game players, are generally finished in finitely many moves. Pure mathematicians are not so constrained, and set theorists in particular study games that last for infinitely many moves, with the winner (or other payoff) not known until after all those moves are completed.

The focus of attention is usually not so much on what is the best way to play such a game, but simply on whether one or the other player has a winning strategy. (It can be proven, using the axiom of choice, that there are games—even with perfect information, and where the only outcomes are "win" or "lose"—for which neither player has a winning strategy.) The existence of such strategies, for cleverly designed games, has important consequences in descriptive set theory.

Discrete and continuous games

Much of game theory is concerned with finite, discrete games, that have a finite number of players, moves, events, outcomes, etc. Many concepts can be extended, however. Continuous games allow players to choose a strategy from a continuous strategy set. For instance, Cournot competition is typically modeled with players' strategies being any non-negative quantities, including fractional quantities.

Differential games

Differential games such as the continuous pursuit and evasion game are continuous games where the evolution of the players' state variables is governed by differential equations. The problem of finding an optimal strategy in a differential game is closely related to the optimal control theory. In particular, there are two types of strategies: the open-loop strategies are found using the Pontryagin maximum principle while the closed-loop strategies are found using Bellman's Dynamic Programming method.

A particular case of differential games are the games with random time horizon. In such games, the terminal time is a random variable with a given probability distribution function. Therefore, the players maximize the mathematical expectation of the cost function. It was shown that the modified optimization problem can be reformulated as a discounted differential game over an infinite time interval.

Many-player and population games

Games with an arbitrary, but finite, number of players are often called n-person games (Luce & Raiffa 1957). Evolutionary game theory considers games involving a population of decision makers, where the frequency with which a particular decision is made can change over time in response to the decisions made by all individuals in the population. In biology, this is intended to model (biological) evolution, where genetically programmed organisms pass along some of their strategy programming to their offspring. In economics, the same theory is intended to capture population changes because people play the game many times within their lifetime, and consciously (and perhaps rationally) switch strategies (Webb 2007).

Stochastic outcomes (and relation to other fields)

Individual decision problems with stochastic outcomes are sometimes considered "one-player games". These situations are not considered game theoretical by some authors. They may be modeled using similar tools within the related disciplines of decision theory, operations research, and areas of artificial intelligence, particularly AI planning (with uncertainty) and multi-agent system. Although these fields may have different motivators, the mathematics involved are substantially the same, e.g. using Markov decision processes (MDP).

Stochastic outcomes can also be modeled in terms of game theory by adding a randomly acting player who makes "chance moves", also known as " moves by nature" (Osborne & Rubinstein 1994). This player is not typically considered a third player in what is otherwise a two-player game, but merely serves to provide a roll of the dice where required by the game.

For some problems, different approaches to modeling stochastic outcomes may lead to different solutions. For example, the difference in approach between MDPs and the minimax solution is that the latter considers the worst-case over a set of adversarial moves, rather than reasoning in expectation about these moves given a fixed probability distribution. The minimax approach may be advantageous where stochastic models of uncertainty are not available, but may also be overestimating extremely unlikely (but costly) events, dramatically swaying the strategy in such scenarios if it is assumed that an adversary can force such an event to happen. (See black swan theory for more discussion on this kind of modeling issue, particularly as it relates to predicting and limiting losses in investment banking.)

General models that include all elements of stochastic outcomes, adversaries, and partial or noisy observability (of moves by other players) have also been studied. The "gold standard" is considered to be partially observable stochastic game (POSG), but few realistic problems are computationally feasible in POSG representation.

Metagames

These are games the play of which is the development of the rules for another game, the target or subject game. Metagames seek to maximize the utility value of the rule set developed. The theory of metagames is related to mechanism design theory.

The term metagame analysis is also used to refer to a practical approach developed by Nigel Howard (Howard 1971) whereby a situation is framed as a strategic game in which stakeholders try to realise their objectives by means of the options available to them. Subsequent developments have led to the formulation of confrontation analysis.

History

Early discussions of examples of two-person games occurred long before the rise of modern, mathematical game theory. The first known discussion of game theory occurred in a letter written by James Waldegrave in 1713. In this letter, Waldegrave provides a minimax mixed strategy solution to a two-person version of the card game le Her. James Madison made what we now recognize as a game-theoretic analysis of the ways states can be expected to behave under different systems of taxation. In his 1838 Recherches sur les principes mathématiques de la théorie des richesses (Researches into the Mathematical Principles of the Theory of Wealth), Antoine Augustin Cournot considered a duopoly and presents a solution that is a restricted version of the Nash equilibrium.

The Danish mathematician Zeuthen proved that the mathematical model had a winning strategy by using Brouwer's fixed point theorem. In his 1938 book Applications aux Jeux de Hasard and earlier notes, Émile Borel proved a minimax theorem for two-person zero-sum matrix games only when the pay-off matrix was symmetric. Borel conjectured that non-existence of mixed-strategy equilibria in two-person zero-sum games would occur, a conjecture that was proved false.

Game theory did not really exist as a unique field until John von Neumann published a paper in 1928. Von Neumann's original proof used Brouwer's fixed-point theorem on continuous mappings into compact convex sets, which became a standard method in game theory and mathematical economics. His paper was followed by his 1944 book Theory of Games and Economic Behaviour. The second edition of this book provided an axiomatic theory of utility, which reincarnated Daniel Bernoulli's old theory of utility (of the money) as an independent discipline. Von Neumann's work in game theory culminated in this 1944 book. This foundational work contains the method for finding mutually consistent solutions for two-person zero-sum games. During the following time period, work on game theory was primarily focused on cooperative game theory, which analyzes optimal strategies for groups of individuals, presuming that they can enforce agreements between them about proper strategies.

In 1950, the first mathematical discussion of the prisoner's dilemma appeared, and an experiment was undertaken by notable mathematicians Merrill M. Flood and Melvin Dresher, as part of the RAND corporation's investigations into game theory. Rand pursued the studies because of possible applications to global nuclear strategy. Around this same time, John Nash developed a criterion for mutual consistency of players' strategies, known as Nash equilibrium, applicable to a wider variety of games than the criterion proposed by von Neumann and Morgenstern. This equilibrium is sufficiently general to allow for the analysis of non-cooperative games in addition to cooperative ones.

Game theory experienced a flurry of activity in the 1950s, during which time the concepts of the core, the extensive form game, fictitious play, repeated games, and the Shapley value were developed. In addition, the first applications of game theory to philosophy and political science occurred during this time.

In 1965, Reinhard Selten introduced his solution concept of subgame perfect equilibria, which further refined the Nash equilibrium (later he would introduce trembling hand perfection as well). In 1967, John Harsanyi developed the concepts of complete information and Bayesian games. Nash, Selten and Harsanyi became Economics Nobel Laureates in 1994 for their contributions to economic game theory.

In the 1970s, game theory was extensively applied in biology, largely as a result of the work of John Maynard Smith and his evolutionarily stable strategy. In addition, the concepts of correlated equilibrium, trembling hand perfection, and common knowledge were introduced and analyzed.

In 2005, game theorists Thomas Schelling and Robert Aumann followed Nash, Selten and Harsanyi as Nobel Laureates. Schelling worked on dynamic models, early examples of evolutionary game theory. Aumann contributed more to the equilibrium school, introducing an equilibrium coarsening, correlated equilibrium, and developing an extensive formal analysis of the assumption of common knowledge and of its consequences.

In 2007, Leonid Hurwicz, together with Eric Maskin and Roger Myerson, was awarded the Nobel Prize in Economics "for having laid the foundations of mechanism design theory." Myerson's contributions include the notion of proper equilibrium, and an important graduate text: Game Theory, Analysis of Conflict (Myerson 1997). Hurwicz introduced and formalized the concept of incentive compatibility.

Popular culture

The life story of game theorist and mathematician John Nash was turned into a biopic, A Beautiful Mind starring Russell Crowe, based on the book by Sylvia Nasar.

"Games-theory" and "theory of games" are mentioned in the military science fiction novel Starship Troopers by Robert A. Heinlein. In the 1997 film of the same name the character Carl Jenkins refers to his assignment, military intelligence, as "games and theory."

One of the main gameplay decision-making mechanics of the video game Zero Escape: Virtue's Last Reward is based on game theory. Some of the characters even reference the prisoner's dilemma.

The movie Dr. Strangelove satirizes game theoretic ideas about deterrence theory. For example, nuclear deterrence depends on the threat to retaliate catastrophically if a nuclear attack is detected. A game theorist might argue that such threats can fail to be credible, in the sense that they can lead to subgame imperfect equilibria. The movie takes this idea one step further, with the Russians irrevocably committing to a catastrophic nuclear response without making the threat public.