What exactly is Nash's "Game theory" & why is it used in economics?

Answer 1

As the other two people have mentioned, Game Theory is about finding the optimal strategy for a given "game." Nash realized that the optimal strategy may be best if people think about the group and not them self.

A common game theory problem is "the Prisoners' Dilemma" (http://en.wikipedia.org/wiki/Prisoners_Dilemma). What happens here is two prisoners are placed in rooms and are not able to communicate with each other. There are four choices:
Both stay silent: both serve 6 months
PA tells and PB stays silent: PA goes free, PB serves 2 years.
PB tells and PA stays silent: PB goes free, PA serves 2 years.
Both tell: both serve 2 years.

The optimal outcome for the prisoners would be not to tell, but game theory says that they would tell. Why?

Assume PB doesn't tell (but PA doesn't know this), then if PA doesn't tell, he serves 6 months, and if he does tell, he goes free. He would obviously want to tell in this situation.
Assume PB does tell: If PA doesn't tell, he will serve 10 years, if he does, he will only serve 2. So he wants to tell.

(Likewise for PB) This shows that PA would rather tell no matter what PB does.

What Nash's theory states, is that it is best for them both to shut up, and don't think about them self.

How is this used in real world economics?
Take Pepsi and Coke for example:
They don't want you to not drink the opponents product, they want you to drink more soda in general. If they bash the other product, there sales would go up, but overall sales would go down, and the other company would bash back. If they "challenge" the other product, they are giving the other product "air time" which increases sales of both products. Thus overall when the companies "play together" they will increase overall soda sales and thus increase each ether's profits. Even though they would get a better initial boost by bashing the other product. (this is not a scientifically proven example :))

Hope that helps.

Answer 2

In game theory, you assume that each player will make the most optimal move to increase his chance of winning.

In some games, the first player can always force a win, in other games the second player can force a win. In tic-tac-toe both players playing optimally will force a draw.

This would be useful in economics when different companies compete for say market share, or profitability.

I haven't read a lot about it maybe a little while studying Operations research, and a lecture or two by John Conway. I have not read the article below, but I usually find good info at this site. The situation in the bar with the girl is an example.

Answer 3

Game Theory is used to go beyond available evidence to form a conclusion. If the premises are true, then the conclusion is valid. The task of making deductions consists of three stages. First, a person must understand the meaning of the premises. Next they must be able to formulate a valid conclusion. Thirdly, a person should evaluate their conclusion to tests its validity.

The object of game theory is to determine strategic situations where players choose different actions in an attempt to maximize their returns. Game theory studies decisions that are made in an environment where various players interact.

Answer 4

nash's equilibrium condition gives the outcome of a game when players play a game with pure rationality without any bias.

It is usually used to study the departure from rationality in real life economic situations

some articles are given below.

Answer 5

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