game theory


Definition of game theory

: the analysis of a situation involving conflicting interests (as in business or military strategy) in terms of gains and losses among opposing players

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Other Words from game theory

game theorist noun

Examples of game theory in a Sentence

Recent Examples on the Web Wiser was an associate professor of economics and finance specializing in game theory and mathematics in the University of South Alabama’s Mitchell College of Business. al, "2 charged with murder of University of South Alabama professor," 13 Dec. 2019 Wiser was a economics professor with a specialization in game theory at the university at the time of his murder. al, "Mobile police offering $5,000 reward for information that leads to arrest in USA professor homicide," 25 Nov. 2019 The company uses techniques derived from game theory to decide how much each data point is worth. Wired, "Oasis Labs' Dawn Song on a Safer Way to Protect Your Data," 8 Nov. 2019 In the 1940s our belief in self-interest intensified with the creation of game theory, which uses mathematical models to determine the optimal, rational strategies in games and strategic conflicts. Time, "How the Bento Box Change Can Change How We See the World?," 5 Nov. 2019 By the time John Nash turned 30 in 1958, he was being hailed as a mathematical genius—a wunderkind who had made pioneering advances in the field of game theory. Brigit Katz, Smithsonian, "John Nash’s Nobel Prize Sells for $735,000," 29 Oct. 2019 Zachary studies game theory, and the novel relies frequently on rules and tropes of video game design. Maureen Lee Lenker,, "Erin Morgenstern celebrates literary magic with The Starless Sea," 16 Oct. 2019 In fact, profitability is as much a function of game theory as capacity and cost management. Tim Culpan | Bloomberg, Washington Post, "Why These Chipmakers Need Their Own OPEC," 25 July 2019 The physicists and molecular biologists employed statistical mechanics and game theory to help build explanatory mathematical models of DNA, proteins and entire genomes. Peter Byrne, Quanta Magazine, "Debating the Evolution of Multicellularity," 25 Sep. 2013

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'game theory.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

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First Known Use of game theory

1945, in the meaning defined above

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The first known use of game theory was in 1945

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Last Updated

3 Jan 2020

Cite this Entry

“Game theory.” The Dictionary, Merriam-Webster Inc., Accessed 18 January 2020.

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More Definitions for game theory

game theory


Financial Definition of game theory

What It Is

Game theory is a tool used to analyze strategic behavior by taking into account how participants expect others to behave. Game theory is used to find the optimal outcome from a set of choices by analyzing the costs and benefits to each independent party as they compete with each other.

How It Works

Game theory explores the possible outcomes of a situation in which two or more competing parties look for the course of action that best benefits them. No variables are left to chance, so each possible outcome is derived from the combinations of simultaneous actions by each party.

Game theory is best exemplified by a classic hypothetical situation called the Prisoners' Dilemma. In this scenario, two people are arrested for stealing a car. They will each serve 2 years in prison for their crime.

The case is air-tight, but the police have reason to suspect that the two prisoners are also responsible for a recent string of high-profile bank robberies. Each prisoner is placed in a separate cell. Each is told he is suspected of being a bank robber and questioned separately regarding the robberies. The prisoners cannot communicate with each other.

The prisoners are told that a) if they both confess to the robberies, they'll each serve 3 years for the robberies and the car theft, and b) if only one confesses to the robbery and the other does not, the one who confesses will be rewarded with a 1 year sentence while the other will be punished with a 10 year sentence.

In the game, the prisoners have only two possible actions: confess to the bank robbery, or deny having participated in the bank robbery.

Since there are two players, each with two different strategies, there are four outcomes that are possible:

The best option for both prisoners is to deny committing the robberies and face 2 years in prison for the car theft. But because neither can be guaranteed that the other won't confess, the most likely outcome is that both prisoners will hedge their bets and confess to the robberies -- effectively taking the 10 year sentence off the table and replacing it with the 3 year sentence.

Why It Matters

Economists use game theory to understand the behavior of firms in an oligopoly (think OPEC and other cartels) -- specifically in regards to price fixing, price wars, collusion, etc. Game theory gives economists a way to predict outcomes when firms engage in these kinds of behavior.

Source: Investing Answers

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