Schelling's Game Theory: How to Make Decisions

By Robert V. Dodge | Go to book overview

CHAPTER 4
Game Theory

It was 1944 when economist Oskar Morgenstern and mathematical wizard John von Neumann released The Theory of Games and Economic Behavior1and the new methodology was formalized. Game theory is not a theory of anything, but an approach to analyzing situations. The name was a result of the authors’ observations of characteristics of parlor games like checkers and chess. The games had rules and scoring systems, and the amount of information available to each player was specified at every point. Most importantly, the decisions players made were interdependent. Making a wise move in chess depended on the moves one’s opponent made or was likely to make, and both players would try to think as their opponent was thinking before deciding on a play. The authors thought there were similar situations in economics and set out to make mathematical models of conflict and cooperation that would determine expectations game players could have about each other’s choices.

While game theory is most commonly studied in economics, it has long since branched out to find application across the social sciences and in the natural sciences as well. It has become a discrete mathematics topic that has made many strides, while mathematicians and social scientists advance different frontiers in its progress. Nobel Laureate Robert Aumann pointed this out, writing,

“Interactive Decision Theory” would perhaps be a more descriptive name
for the discipline usually called Game Theory. This discipline concerns
the behaviour of decision makers (players) whose decisions affect each
other. As in non-interactive (one person) decision theory, the analysis
is from a rational, rather than a psychological or sociological viewpoint.

The term “Game Theory” stems from the formal resemblance of inter-
active decision problems (games) to parlour games The term also
underscores the rational, “cold,” calculating nature of the analysis.2

He went on to say that it has become an umbrella, or “unified field” in social sciences that applies to economics, political science, tactical and strategic problems, evolutionary biology, and computer science and also social psychology and branches of philosophy such as epistemology.3

-29-

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