Although often discredited, Games Theory can still shed light on human behaviour. What follows is an extract from a work-in-progress:
Games Theory is the study of situations where two or more players interact in accordance with a set of rules, and in particular where such situations arise in our political and economic life. Surprisingly it is fairly recent, generally considered to date from 1928 when John von Neumann’s book Zur Theorie der Gesellschaftsspiele (‘On the Theory of Parlour Games’) was first published. This was followed in 1944 by Theory of Games and Economic Behavior which Neumann co-authored with Oskar Morgenstern.
There are essentially two types of games. Zero-sum games are those where one player wins and the other loses. Typical examples include tic-tac-toe (also known as noughts and crosses), chess, poker and football. Rather more interesting are non zero-sum games where outcomes include the possibility of both players improving their situation. Perhaps the most important non zero-sum game in the economic world is the act of shopping. Sellers only sell their goods when they regard the money being offered as having greater value than the goods itself. Buyers only buy when they regard the goods as being worth more than the money asked. If both sides can agree a price then both walk away from the deal as winners. Continue reading