A while back, we spoke to one of our most successful economics alums who is now a lawyer. We asked him, “Which topic that you learned as an economics major is most useful to you?”  He mentioned game theory because it helped him to interact more productively with others. 

Game theory models human interaction as a game. It identifies the players, their options, the incentives they face, and the likely outcomes of their interactions. Different players, options, and incentives create different games.  

The prisoner’s dilemma is a well-known game of conflict and cooperation. The name comes from the common police practice of interrogating two prisoners suspected of a jointly committed crime in separate rooms. If both say nothing, their penalty will be light. However, both are offered amnesty if they implicate the other prisoner and an extremely harsh penalty if they do not. Both then have a strong incentive to talk. If both talk, this usually provides more than enough evidence to impose a harsher penalty than if neither had spoken. 

A similar incentive structure emerges when two firms collude to monopolize a market. Both firms are more profitable if they both agree to reduce output to support a higher market price. But each is even more profitable if the other party reduces output and their firm cheats.  

Prisoner’s dilemma games apply to price wars, resource hoarding, political gridlock, and environmental overuse. Ways of overcoming the dilemma include social mores against defection, explicit contractual arrangements, or forceful legal interventions.  

In coordination games, people benefit from cooperating and choosing the same result. For example, we benefit when we agree on which side of the road to drive on, or on technology standards such as using the same electrical outlet standards across a country. Social norms, such as waiting your turn in line, are also examples. Typical solutions to coordination games include clear communication and focal points, such as standard rules, protocols, and shared deadlines.   

In a sequential-move game, one player chooses their action before the others, such as tic-tac-toe, checkers, or chess. Many negotiations are sequential-move games in which one side goes first, and the others respond. In simultaneous-move games, all players choose their actions at the same time. For example, in rock-paper-scissors and sealed-bid auctions, players simultaneously choose.  

Understanding the game one is playing and familiarity with its likely outcomes and pitfalls help one discover strategies that work best in interactions with others.