Game theory

On a superficial level the prisoners’ dilemma appears to run counter to Adam Smith’s idea of the invisible hand. When each person in the game pursues his private interest, he does not promote the collective interest of the group. But often a group’s cooperation is not in the interests of society as a whole.

Therefore companies that pursue their own self-interest by cheating on collusive agreements often help the rest of society.

The most common path to cooperation arises from repetitions of the game.

Like the general, a game player must recognize his interaction with other intelligent and purposive people. His own choice must allow both for conflict and for possibilities for cooperation.

The essence of a game is the interdependence of player strategies.

There are two distinct types of strategic interdependence: sequential and simultaneous. In the former the players move in sequence, each aware of the others’ previous actions. In the latter the players act at the same time, each ignorant of the others’ actions.

A general principle for a player in a sequential-move game is to look ahead and reason back. Each player should figure out how the other players will respond to his current move, how he will respond in turn, and so on.

In contrast to the linear chain of reasoning for sequential games, a game with simultaneous moves involves a logical circle. Each must figuratively put himself in the shoes of all and try to calculate the outcome. His own best action is an integral part of this overall calculation.

This logical circle is squared (the circular reasoning is brought to a conclusion) using a concept of equilibrium developed by the Princeton mathematician john nash.

A player can use threats and promises to alter other players’ expectations of his future actions, and thereby induce them to take actions favorable to him or deter them from making moves that harm him. To succeed, the threats and promises must be credible. This is problematic because when the time comes, it is generally costly to carry out a threat or make good on a promise.The general principle is that it can be in a player’s interest to reduce his own freedom of future action.