The study of economics, political science, and the social sciences more generally is an attempt to understand the ways in which people behave and make decisions, as individuals and in group settings. The goal is often to apply our understanding to the analysis of questions pertinent to the functioning of societies and their institutions, such as markets, governments, and legal institutions. Social scientists have developed frameworks and rigorous models that abstract from reality with the intent of focusing attention on the crux of the issues at hand, while ignoring details that seem less relevant and more peripheral.We use these models not only to shed light on what we observe but also to help us predict what we cannot yet see. One of the ultimate goals is to prescribe policy recommendations to the private and public sectors, based on the simplistic yet rigorous models that guide our analysis. In this process we must be mindful of the fact that the strength of our conclusions will depend on the validity of our assumptions, in particular those regarding human behavior and the environment in which people act.
Game theory provides a framework based on the construction of rigorous models that describe situations of conflict and cooperation between rational decision makers. Following the tradition of mainstream decision theory and economics, rational behavior is defined as choosing actions that maximize one’s payoff (or some form of payoff ) subject to the constraints that one faces. This is clearly a caricature of reality, but it is a useful benchmark that in many cases works surprisingly well. Game theory has been successfully applied to many relevant situations, such as business competition, the functioning of markets, political campaigning, jury voting, auctions and procurement contracts, and union negotiations, to name just a few. Game theory has also shed light on other disciplines, such as evolutionary biology and psychology.
This book provides an introduction to game theory. It covers the main ideas of the field and shows how they have been applied to many situations drawn mostly from economics and political science. Concepts are first introduced using simple motivating examples, then developed carefully and precisely to present their general formulation, and finally used in a variety of applications.