Game Theory: Prisoner’s Dilemma

Simply put, game theory is the study of making choices. It is about strategic decision making, and its outcomes when two or more economic agents interact. This is a very important field of study, and can help predict major events. Taking a very grass root example, the prisoners dilemma is the best way to explain game theory.

Imagine two criminals who have been caught by the police for drug possession. They both are suspected of having committed a larger crime, and are hence taken into two separate interrogation room. Each player can either confess, or deny, as shown in the matrix below (source: khanacademy.org ). Screen Shot 2014-07-19 at 7.55.23 AM

It is found that if either criminal knows the choice of his other, he will go for the option that benefits himself . If the other criminal then changes his choice, they both get the worse prison sentence, hence validating the Nash equilibrium, “which is a solution concept of a non-cooperative game in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only their own strategy. If each player has chosen a strategy and no player can benefit by changing strategies while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs constitute a Nash equilibrium.”

 

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