One of the hardest challenges in the field of economics is predicting what exactly people will do when faced with certain economic situations. There have been many different models to attempt to do this, but most of them have been somewhat inadequate. So far, the best method of doing this, and the one that is most continuously used today, is a principle that is called ‘game theory’. Game theory is the study of equations that make up the logical decision making process in people (as well as animals and machines). Today, scientists have been able to apply game theory to microeconomics, macroeconomics, biology, animal behavior, robotics, and even games like chess and poker. Here is some information on game theory and the study of economic controllers...

History of game theory

The general foundation for economic game theory was actually laid in 1913, by Ernst Zermelo, in an essay that was actually written about optimal chess strategies, where he outlined several formulas to help dictate what an opponent would do with the options that were provided to them. However, the real beginning of formal game theory came to fruition in 1928, when John Von Neumann coined the term and applied game theory to the field of mathematical economics. He fully outlined his thoughts in 1944, in the book The Theory of Games and Economic Behavior. Later on, in the 1950’s, research on game theory skyrocketed, especially in the field of nuclear strategy with the Soviets. However, the truly beneficial research activity was in how groups of individuals would influence each other’s behaviors, which helped us greatly understand economic movement.

Zero-sum games

The premise of game theory is based on a situation called a zero-sum game. A zero-sum game is an equation that mathematically demonstrates how an individual’s (or group of individuals) potential to lose or gain something of value will affect their decisions and actions. This equation is then contrasted with equations of what other participants in the situation will stand to gain or lose. The more participants that are added into the equation, the more complicated it will become, since their decisions will affect those of everyone around them. However, the simplicity of a zero-sum game is the supposition that the gains and losses of utility of each participant will eventually round out to zero, which is predicted by the theory of the Nash equilibrium.