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

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Gerry Mackie has shown that this can be explained using the ideas of game theory and coordination. Angela Chen, The Verge, "How History Gets Things Wrong," 5 Oct. 2018 The NYU Department of Politics professor is known for his work applying game theory to subjects like voting reform and fair division. Jason Gay, WSJ, "A Radical Pitch to Save Baseball," 29 Aug. 2018 One character didn't require so much homework, and that was Rachel Chu (played by Constance Wu), an economics professor at NYU who specializes in game theory and the girlfriend of one Nick Young. Deanna Pai, Glamour, "How Makeup Can Make You Look Rich, According to the Crazy Rich Asians Makeup Artist," 22 Aug. 2018 Probing a partner’s weaknesses can be an effective way to get a better trade deal, according to game theory, the branch of mathematics that deals with strategy., "Using Game Theory to Explain the U.S.-China Spat," 21 June 2018 Once both the attacker and defender can be simulated, game theory can identify their best strategies in this competition. Daniel Lowd, Scientific American, "Can Facebook Use AI to Fight Online Abuse?," 13 June 2018 Thomas Schelling won the Nobel prize in economics in 2005 for his work on game theory in relation to conflict resolution and avoiding war. Kwegyirba Croffie And Madeleine Thompson, CNN, "Family auctions Nobel medal for $187,000. Donates it to fight hate," 2 June 2018 Schelling was a master of game theory, particularly focusing on cases where two conflicting sides repeatedly interact in international trade deals, according to Elise Takahama,, "Nobel Prize of former Harvard professor sold for $187,000 in fight against hate," 1 June 2018 Finite and Infinite Games by James P. Carse, a book about game theory written by a religious scholar, is admittedly very weird. Emily Heller, Vox, "5 books making the case that American democracy is in trouble," 23 Apr. 2018

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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Last Updated

26 Apr 2019

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The first known use of game theory was in 1945

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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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