game theory

Game Theory

A model of how decisions are made that includes not only the thought processes of the individual, but also interaction between individuals. Game theory attempts to explain how one seeks to maximize one's own benefit given the information one has received from other persons. It attempts to mathematically weigh the odds of a person making a decision under certain circumstances with limited information. See also: Prisoner's dilemma.

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game theory

The science of evaluating the relationships among parties and the optimal choices for participants in any given situation. Game theory is an important tool in negotiating. Two frequently encountered game theory models are the prisoner's dilemma and chicken.

• The prisoner's dilemma model involves parties trusting each other to make the best choice for all, without prearranging their plans, rather than making the best choice for an individ- ual. This is seen in the real estate world in quoting commissions, which involves informal, nonverbal negotiations among real estate agents. Although there is no price fixing going on, all brokers understand that if they cooperate and refuse to lower prices, they will all make a good living. If one or a few lower commission rates in order to capture a lot more business, those few will do well until all brokers lower their prices and get into a price war, after which all will do poorly.

• Chicken is the “sport” of two cars racing against each other, head-on, with the first one to swerve being labeled chicken and losing the match. The best way to win a game of chicken is to remove your ability to swerve and to let the other side know that you no longer have any freedom to move—no freedom of negotiation, in other words. For example, the com- mon use of the chicken theory is to tell a seller that you do not have, and cannot borrow, enough money to meet the asking price. The seller will have to reduce the price, or you will have to find another property.