Definition Of Game Theory - Economist

Game theory is a theoretical framework for conceiving social situations among competing players. In some respects, game theory is the science of strategy, or at least the optimal decision-making of independent and competing actors in a strategic setting.

Many important and interesting situations can be studied as if they were games. Consider bidding for an item listed on eBay.

How much should you bid and when should you make your bid? In this case, the success of the decision depends on the choices made by other bidders. 

Game theory provides a way of thinking about this and similar situations of interactive decision-making.

Imagine the following situation. It’s a penalty shoot out and you have been chosen to take a penalty. You are faced with a key decision: do you shoot to the right, to the left, or straight down the middle? 

Your success depends not only on which of these three options you pick but whether the goalkeeper decides to dive to the left, the right, or simply stay where he is.

In other words, the success of your penalty depends not only on what you do but also on what the goalkeeper decides to do.