Game Theory Chapter 0: A Vague Overview Before we plunge into the middle of things, we will attempt to answer some

questions. 1. 2. 3. 4. What is game theory about? Where is it coming from? Where is it going to? What can it do for us?

These are big questions to which there are no neat and tidy answers. An intro can only give some flavor of the answers that game theorists offer.

I. What is game theory about? A game is being played whenever people interact with each other: (1) If you drive a car in a busy city street, you are playing a game with the drivers of the other cars. (2) When you make a bid at an auction, you are playing a game with the other bidders. (3) When a supermarket manager decides the price at which she will try to sell an item, she is playing a game with her customers and the managers of rival supermarkets. (4) When a firm and a union negotiate nexts years wage contract, they are playing a game. (5) The prosecuting and defending attorneys are playing a game when each decides what arguments to put before the jury. (6) Napoleon & Wellington were playing a game at the battle of Waterloo, and so were Khrushchev and Kennedy during the Cuban missile crisis. If all these situations are games, then game theory is clearly something important. However, this doesnt mean that game theorists are the people to ask for answers to all the worlds problems! Reason: game theory, as currently developed, is mostly about what happens when people interact in a rational manner.
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Game Theory = rational interaction between groups of people. Warning: even when we are not actively thinking things out in advance, it does not necessarily, it does not necessarily follow that we are behaving irrationally. EX: Insects and plants behave rationally but neither can be said to think at all! When considering strategic issues, circular reasoning cannot be evaded. Therefore, it is not surprising that game theory abounds with surprises and paradoxes. (See Activity)

II. Where is it coming from? Economists Cournot and Edgeworth had anticipated some of the ideas (19th century). Later, mathematicians Borel and Zermelo made some contributions. Von Neumann laid the ground work in a paper published in 1928. However, game theory was created by Von Neumann and Morgenstern in their classic book The Theory of Games and Economics Behavior (1944). In a sequence of remarkable papers in the early fifties, John Nash (Beautiful Mind, remember?) gave a general formulation of the equilibrium idea. Currently, the notion of Nash equilibrium is one of the most important tools that game theorists have at their disposal. There are also some names that cannot pass unmentioned. The acronym NASH may assist in remembering who they are: N: Nash A: Aumann S: Shapley H: Harsanyi III. Where is Game Theory Going? As information and computation concern ever smaller bits of information, classical behavior is replaced by the rules of quantum mechanics. Appropriately adjusted to the quantum domain, game theory remains a powerful tool for future study.

4. What Can Game Theory Do for Us? Game theory has a wide variety of applications: Economics: there is a vast area of economic games (Myerson 1991, Kreps 1990). Politics: political games (Ordeshook 1986, Shubik 1982, Taylor 1995). Psychology: Berne 1964. Biology: Smith 1982. Logic & Computer Sciences: Blackwell and Girshick (1954), Ferguson (1968). Physics: Meyer (1999)