What is Game Theory? A Simple Introduction

Have you ever wondered why gas stations on the same corner charge similar prices? Or why countries engage in arms races even though both would be better off spending less on weapons? Or why you and your friends can’t decide where to eat, even though everyone wants to go somewhere?

These situations all involve strategic decision-making—and that’s exactly what game theory studies.

What is Game Theory?

Game theory is the mathematical study of strategic interactions. It’s a framework for understanding situations where your best choice depends on what others choose, and their best choice depends on what you choose.

Think of it this way: in a game of solitaire, the outcome depends only on your moves and luck. But in poker, chess, or business negotiations, what happens depends on what everyone does. That’s what makes these situations “strategic.”

Why “Game” Theory?

The word “game” might make it sound frivolous, but game theory applies to deadly serious situations:

• Military strategy: Nations deciding whether to cooperate or compete
• Business: Companies setting prices, choosing product features, timing market entry
• Economics: Markets, auctions, bargaining, resource allocation
• Biology: Evolution of cooperation, predator-prey dynamics, mating strategies
• Politics: Voting systems, coalition formation, international treaties
• Daily life: Negotiating salaries, splitting restaurant bills, choosing routes in traffic

A Simple Example: Rock-Paper-Scissors

Let’s start with something familiar. In rock-paper-scissors:

• Rock beats scissors
• Scissors beats paper
• Paper beats rock

This is a “game” in the mathematical sense because:

1. Players: You and your opponent
2. Strategies: Each person chooses rock, paper, or scissors
3. Payoffs: Winner gets +1, loser gets -1, tie gets 0

The key insight: there’s no single “best” strategy. If you always play rock, your opponent will learn to play paper. The optimal strategy is to be unpredictable—to randomize your choices.

The Core Questions of Game Theory

Game theory helps answer three fundamental questions:

1. What will rational players do?

If everyone is smart and acts in their own interest, what outcome should we expect?

Example: Two coffee shops deciding whether to open late. Each knows the other is analyzing the same situation.

2. What is the optimal strategy?

What should you do to get the best possible outcome, given what others might do?

Example: How should you bid in an auction when you don’t know what others will bid?

3. How can we design better systems?

If we can predict what people will do, how can we design rules and incentives to create better outcomes?

Example: How should we design auctions, voting systems, or environmental regulations to achieve desired goals?

Key Concepts You’ll Learn

As you explore game theory, you’ll encounter these powerful ideas:

Nash Equilibrium: A situation where no one can improve by changing their strategy alone. It’s where rational players end up.

Dominant Strategy: A strategy that’s best no matter what others do. When you have one, your decision is easy.

Zero-Sum Games: Situations where one person’s gain is another’s loss, like poker or chess.

Prisoner’s Dilemma: The most famous game, showing how individual rationality can lead to collective disaster.

Coordination Games: Situations where everyone wants to do the same thing, but needs to figure out what that thing should be.

Why Should You Care?

Understanding game theory will change how you see the world:

In business: You’ll understand why competitors make certain moves and how to respond strategically.

In negotiations: You’ll know when to cooperate, when to hold firm, and how to structure deals for mutual benefit.

In life: You’ll recognize strategic situations everywhere and make better decisions when your outcome depends on what others choose.

In society: You’ll understand why some social problems are so hard to solve—not because people are stupid or malicious, but because the incentive structure makes cooperation difficult.

The Beauty of Mathematical Thinking

What makes game theory powerful is that it takes messy, complex human situations and finds the underlying mathematical structure. Once you see the structure, you can:

• Predict behavior more accurately
• Design better incentives
• Understand why certain outcomes keep occurring
• Find solutions that work with human nature rather than against it

A Warning: Assumptions Matter

Game theory makes some important assumptions:

1. Rationality: Players act in their own self-interest
2. Common knowledge: Everyone knows the rules and payoffs
3. Strategic thinking: Players consider what others will do

These assumptions don’t always hold perfectly in real life. People can be irrational, emotional, or poorly informed. But game theory still provides valuable insights—even when people aren’t perfectly rational, they often behave “as if” they were.

What’s Next?

Now that you know what game theory is, the next step is to understand specific types of games and their surprising properties. In the following posts, we’ll explore:

• The Prisoner’s Dilemma and why cooperation is so hard
• Nash Equilibrium and how to find stable outcomes
• Zero-sum games where competition is inevitable
• Dominant strategies that make decisions easy
• Coordination games where the challenge is agreeing on what to do

Each of these concepts will give you new tools for analyzing strategic situations and making better decisions.

This is part of our Game Theory Series. Whether you’re interested in business, economics, politics, or just making better decisions in daily life, game theory provides powerful frameworks for understanding strategic interactions.