A concept · How People Actually Work · Strategy
Game Theory
Your best move depends on everyone else’s best move.
Two shops on the same street both cut prices, and both end up poorer than if neither had. Two colleagues both stay late to look committed, and the working day quietly becomes eleven hours for everyone. Nobody wanted the outcome, and nobody made a mistake; each of us chose well given what the other was likely to do. If everyone reasoned properly and everyone lost, where does the fault sit?
What Game Theory means
Game theory is the study of situations where the best choice for each of us depends on the choices everyone else is making, and of what happens when we all reason about that at once. That is the definition. Owning it changes what we look at when things go wrong. We stop asking who was foolish, and start asking what the situation rewards, because a trap can be built entirely out of sensible moves. We stop assuming more cleverness would have saved us; the way out is usually a change to the game, an agreement, a rule, a way to see each other's moves. Before, a price war looked like two stubborn owners. After, it looks like a structure, and structures can be renegotiated.
Not to be confused with
Game theory is not decision theory. Decision theory asks what to do when the outcome depends on chance. Game theory asks what to do when the outcome depends on other people who are asking the same question about us.
Game Theory examples: where it shows up
- At work: the reply-all, the padded estimate, the credit grabbed before the meeting: each a rational move in a game nobody designed.
- With money: the seller waits for the buyer to blink and the buyer waits for the seller, and the house sits unsold for a year.
- In the news: two countries arm because the other is arming, and both spend a fortune to stay exactly where they were.
Where it sits
Concept 4 of 5 in How People Actually Work, a journey in the course How the World Works.
See where Game Theory sits on the sky →
Nearest on the sky
- Collective Action
- Comparative Advantage
- Deterrence
- Keynesian Beauty Contest
- Lucas Critique
- Narrative Identity
A filled dot marks a star that is already open to walk.
Knowing it isn't owning it.
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