Game Theory

Roger Myerson, the author of the book "Game Theory: Analysis of Conflict", provides the following definition of the game theory: "the study of mathematical models of conflict and cooperation between intelligent decision-makers" (Myerson, 1997, p.1). He further explains that the game theory supplies general mathematical techniques that are used for analysis of situations where at least two individuals make such decisions that will have an impact on their welfare.

The essence of the game theory is best understood through the use of descriptive names "conflict analysis" and "interactive decision theory" (Myerson, 1997, p.1) or, as Levine suggests, through the term which describes the game theory in psychology - "the theory of social situations" (Levine, n.d.). Also, the essence of the game theory may be well understood from the definition provided in the Investopedia dictionary. It says the game theory is a model of optimality that takes into account not just less costs or better benefits, but also inter-participant interaction. It looks at the interrelationship between participants within a specific model and foresees these participants' optimal decisions (Investopedia, n.d.).

In their turn, Leyton-Brown and Shoham, in their multidisciplinary approach to understanding the game theory, explain that the latter studies "what happens when self-interested agents interact" (Leyton-Brown & Shoham, 2008, p.3). To add, the game theory is an umbrella term for studies of decision-making in a strategic manner in a number of disciplines including economics, psychology, biology, political science, and logic, etc.

Levine in his article "What is Game Theory?", provides the following instructive example of how game theory operates. The Prisoner's Dilemma, if to apply the game theory, will be solved in the following manner. Two prisoners are partners in one fraudulent crime. Each of them is offered to confess to committing the crime while in a separate cell. If neither of them does this, they will split the sentence, so each will be sentenced to 2 years (Investopedia) or will be released (Levine, n.d.). If both of them decide to plead guilty and will implicate each other, they will get 3 years. If one does not plead guilty but the other confesses, the latter will receive a 1-year sentence, while his partner - the maximum sentence (5 years). If both decide to confess, they will receive a reduced term. In this game, as Levine rightfully notes, "no matter what a suspect believes his partner is going to do, it is always best to confess" (Levine, n.d.)



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