Game Theory Introduction

Game theory studies how rational agents make decisions when outcomes depend on the choices of others.

The Prisoner’s Dilemma

Two criminals are arrested. Each can either confess or stay silent. If both stay silent, both serve 1 year. If one confesses and the other stays silent, the confessor goes free and the other serves 5 years. If both confess, both serve 3 years.

The rational choice for each individual is to confess. The best collective outcome is for both to stay silent. The tension between individual and collective rationality is the heart of game theory.

Nash Equilibrium

A set of strategies where no player can improve their outcome by changing their strategy alone. It is not always the best outcome — but it is the stable one.