Game theory is a fascinating part of micro, and macro, economics. It’s based on the psychological current that underpins all Economics, and simplifies the main economic problem: optimising the use of limited resources; into a series of sets of events that illustrate how this problem drives human interaction. The aim of game theory is to take simple situations as allegories of the much more complex social and economic interaction that takes place every day to explain anything from price wars to altruism.
Understanding game theory may or may not make us more effective in business, economics or our personal lives, but it undoubtedly helps us to highlight and recognise the economic (in the non financial sense of the word) patterns that underpin the better part of the way we base our societies and the way we lead our lives. The fact that many of these same social patterns occur all throughout nature also helps remind us that the most complex societies are based on behaviours and choices not all that far removed from the natural world.
In this first Learning Path on Game theory, we will learn about the main tools and conditions required in order to make a thorough analysis of games. We’ll see how the quality of information shape the way we solve games, and learn about how to describe them. We will start with a simple definition:
Game theory: what it is and how did it evolve for during the last century.
The importance of information:
Complete and incomplete information will determine the scenario we’ll work in;
Common knowledge is a notion that adds importance to complete information;
Perfect and imperfect information, which determines whether players can see each other moves.
Description of games:
Strategic form (or normal form), used mainly for describing simultaneous games using a game matrix;
Extensive form, used when dealing with sequential games, by using a game tree.