Welcome to our series on economic theories that are changing the way we think. Today, Partha Gangopadhyay explains game theory.
Notwithstanding lingering discontent, faint murmurs and mild protests among economists, there is no denying the fact that game theory has assumed central importance in modern economics. In 1994 the first Nobel award to three game theorists - including mathematician John Nash - officially recognised the enviable role that game theory has played in advancing and propelling economic theory.
Game theory is concerned with decision-making in an interactive world such that the best decision of every decision-maker depends on what decisions others make. As a result, everyone in this interactive world, for advancing one’s self interests, will need to predict decisions of others.
Game theory officially entered the world in 1944 with the publication of the magnum opus in game theory, “Theory of Games and Economic Behavior”. This was a joint collaboration between an Austrian economist, Oskar Morgenstern, and John von Neumann - a universally acclaimed genius, polymath and polyglot from Hungary.
But for the purists the exact birth year of game theory is 1928 when von Neumann formally constructed the mini-max theorem in a paper entitled “Zur Theorie der Gesellshaftsspiele” published in a German mathematical journal known as the Mathematische Annalen.
