Game theory, branch of applied 

mathematics that provides tools for analyzing situations in

which parties, called players, make decisions that are interdependent. This interdependence
causes each player to consider the other player’s possible decisions, or strategies, in formulating
strategy. A solution to a game describes the optimal decisions of the players, who may have
similar, opposed, or mixed interests, and the outcomes that may result from these decisions.

Although game theory can be and has been used to analyze parlour games, its applications are
much broader. In fact, game theory was originally developed by the Hungarian-born American
mathematician John von Neumann and his Princeton University colleague Oskar Morgenstern, a
German-born American economist, to solve problems in economics. In their book The Theory of
Games and Economic Behavior (1944), von Neumann and Morgenstern asserted that the
mathematics developed for the physical sciences, which describes the workings of a disinterested
nature, was a poor model for economics. They observed that economics is much like a game,
wherein players anticipate each other’s moves, and therefore requires a new kind of
mathematics, which they called game theory. (The name may be somewhat of a misnomer—
game theory generally does not share the fun or frivolity associated with games.

Game theory has been applied to a wide variety of situations in which the choices of players
interact to affect the outcome. In stressing the strategic aspects of decision making, or aspects
controlled by the players rather than by pure chance, the theory both supplements and goes
beyond the classical theory of probability. It has been used, for example, to determine what
political coalitions or business conglomerates are likely to form, the optimal price at which to
sell products or services in the face of competition, the power of a voter or a bloc of voters,
whom to select for a jury, the best site for a manufacturing plant, and the behavior of certain
animals and plants in their struggle for survival. It has even been used to challenge the legality of
certain voting systems.

It would be surprising if any one theory could address such an enormous range of “games,” and
in fact there is no single game theory. A number of theories have been proposed, each applicable
to different situations and each with its own concepts of what constitutes a solution. This article
describes some simple games, discusses different theories, and outlines principles underlying
game theory. Additional concepts and methods that can be used to analyze and solve decision
problems are treated in the article optimization.
Classification of games

Games can be classified according to certain significant features, the most obvious of which is
the number of players. Thus, a game can be designated as being a one-person, two-person, or n-
person (with n greater than two) game, with games in each category having their own distinctive
features. In addition, a player need not be an individual; it may be a nation, a corporation, or a
team comprising many people with shared interests.

Two-person constant-sum games

Games of perfect information

The simplest game of any real theoretical interest is a two-person constant-sum game of perfect

information. Examples of such games include chess, checkers, and the Japanese game of go. In
1912 the German mathematician Ernst Zermelo proved that such games are strictly determined;
by making use of all available information, the players can deduce strategies that are optimal,
which makes the outcome preordained (strictly determined). In chess, for example, exactly one
of three outcomes must occur if the players make optimal choices: (1) White wins (has a strategy
that wins against any strategy of Black); (2) Black wins; or (3) White and Black draw. In
principle, a sufficiently powerful supercomputer could determine which of the three outcomes
will occur. However, considering that there are some 10 43 distinct 40-move games of chess
possible, there seems no possibility that such a computer will be developed now or in the
foreseeable future. Therefore, while chess is of only minor interest in game theory, it is likely to
remain a game of enduring intellectual interest.
Games of imperfect information

A “saddle point” in a two-person constant-sum game is the outcome that rational players would
choose. (Its name derives from its being the minimum of a row that is also the maximum of a
column in a payoff matrix—to be illustrated shortly—which corresponds to the shape of a
saddle.) A saddle point always exists in games of perfect information but may or may not exist in
games of imperfect information. By choosing a strategy associated with this outcome, each
player obtains an amount at least equal to his payoff at that outcome, no matter what the other
player does. This payoff is called the value of the game; as in perfect-information games, it is
preordained by the players’ choices of strategies associated with the saddle point, making such
games strictly determined.

The normal-form game in Table 1 is used to illustrate the calculation of a saddle point. Two
political parties, A and B, must each decide how to handle a controversial issue in a certain
election. Each party can either support the issue, oppose it, or evade it by being ambiguous. The
decisions by A and B on this issue determine the percentage of the vote that each party receives.
The entries in the payoff matrix represent party A’s percentage of the vote (the remaining
percentage goes to B). When, for example, A supports the issue and B evades it, A gets 80
percent and B 20 percent of the vote.

Payoff matrix with saddle point

Table 1The normal-form table illustrates the concept of a saddle point, or entry, in a payoff
matrix at which the expected gain of each participant (row or column) has the highest guaranteed
payoff.

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Assume that each party wants to maximize its vote. A’s decision seems difficult at first because it
depends on B’s choice of strategy. A does best to support if B evades, oppose if B supports, and
evade if B opposes. A must therefore consider B’s decision before making its own. Note that no
matter what A does, B obtains the largest percentage of the vote (smallest percentage for A) by
opposing the issue rather than supporting it or evading it. Once A recognizes this, its strategy
obviously should be to evade, settling for 30 percent of the vote. Thus, a 30 to 70 percent
division of the vote, to A and B respectively, is the game’s saddle point.

A more systematic way of finding a saddle point is to determine the so-called maximum

and minimax values. A first determines the minimum percentage of votes it can obtain for each
of its strategies; it then finds the maximum of these three minimum values, giving the maximum.
The minimum percentages A will get if it supports, opposes, or evades are, respectively, 20, 25,
and 30. The largest of these, 30, is the maximum value. Similarly, for each strategy B chooses, it
determines the maximum percentage of votes A will win (and thus the minimum that it can win).
In this case, if B supports, opposes, or evades, the maximum A will get is 80, 30, and 80,
respectively. B will obtain its largest percentage by minimizing A’s maximum percent of the
vote, giving the minimax. The smallest of A’s maximum values is 30, so 30 is B’s minimax
value. Because both the minimax and the maximum values coincide, 30 is a saddle point. The
two parties might as well announce their strategies in advance, because the other party cannot
gain from this knowledge.
Mixed strategies and the minimax theorem

When saddle points exist, the optimal strategies and outcomes can be easily determined, as was
just illustrated. However, when there is no saddle point the calculation is more elaborate, as
illustrated in Table 2.

Payoff matrix without saddle point

Table 2When a saddle point does not exist for a payoff matrix, a probabilistic strategy is optimal.
Based on the possible rewards, the participants assign probabilities to each choice so as to
maximize their expected (average) rewards. For instance, in this example the guard should
protect the $100,000 deposit 10 out of 11 times and the $10,000 deposit 1 out of 11 times. Some
type of random number generator (such as, here, an 11-sided die) is used to determine the
appropriate strategy in order to avoid predictability.

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A guard is hired to protect two safes in separate locations: S1 contains $10,000 and S2 contains
$100,000. The guard can protect only one safe at a time from a safecracker. The safecracker and
the guard must decide in advance, without knowing what the other party will do, which safe to
try to rob and which safe to protect. When they go to the same safe, the safecracker gets nothing;
when they go to different safes, the safecracker gets the contents of the unprotected safe.

In such a game, game theory does not indicate that any one particular strategy is best. Instead, it
prescribes that a strategy be chosen in accordance with a probability distribution, which in this
simple example is quite easy to calculate. In larger and more complex games, finding this
strategy involves solving a problem in linear programming, which can be considerably more
difficult.
To calculate the appropriate probability distribution in this example, each player adopts a
strategy that makes him indifferent to what his opponent does. Assume that the guard protects S1
with probability p and S2 with probability 1 − p. Thus, if the safecracker tries S1, he will be
successful whenever the guard protects S2. In other words, he will get $10,000 with probability 1
− p and $0 with probability p for an average gain of $10,000(1 − p). Similarly, if the safecracker
tries S2, he will get $100,000 with probability p and $0 with probability 1 − p for an average gain
of $100,000p.

The guard will be indifferent to which safe the safecracker chooses if the average amount stolen
is the same in both cases—that is, if $10,000(1 − p) = $100,000p. Solving for p gives p = 1/11. If
the guard protects S1 with probability 1/11 and S2 with probability 10/11, he will lose, on
average, no more than about $9,091 whatever the safecracker does.

Using the same kind of argument, it can be shown that the safecracker will get an average of at
least $9,091 if he tries to steal from S1 with probability 10/11 and from S2 with probability 1/11.
This solution in terms of mixed strategies, which are assumed to be chosen at random with the
indicated probabilities, is analogous to the solution of the game with a saddle point (in which a
pure, or single best, strategy exists for each player).

The safecracker and the guard give away nothing if they announce the probabilities with which
they will randomly choose their respective strategies. On the other hand, if they make themselves
predictable by exhibiting any kind of pattern in their choices, this information can be exploited
by the other player.

The minimax theorem, which von Neumann proved in 1928, states that every finite, two-person
constant-sum game has a solution in pure or mixed strategies. Specifically, it says that for every
such game between players A and B, there is a value v and strategies for A and B such that,
if A adopts its optimal (maximum) strategy, the outcome will be at least as favorable to A as v;
if B adopts its optimal (minimax) strategy, the outcome will be no more favorable to A than v.
Thus, A and B have both the incentive and the ability to enforce an outcome that gives an
(expected) payoff of v.
Utility theory

In the previous example it was tacitly assumed that the players were maximizing their average
profits, but in practice players may consider other factors. For example, few people would risk a
sure gain of $1,000,000 for an even chance of winning either $3,000,000 or $0, even though the
expected (average) gain from this bet is $1,500,000. In fact, many decisions that people make,
such as buying insurance policies, playing lotteries, and gambling at a casino, indicate that they
are not maximizing their average profits. Game theory does not attempt to state what a player’s
goal should be; instead, it shows how a player can best achieve his goal, whatever that goal is.

Von Neumann and Morgenstern understood this distinction; to accommodate all players,
whatever their goals, they constructed a theory of utility. They began by listing certain axioms
that they thought all rational decision makers would follow (for example, if a person likes tea
better than coffee, and coffee better than milk, then that person should like tea better than milk).
They then proved that it was possible to define a utility function for such decision makers that
would reflect their preferences. In essence, a utility function assigns a number to each
player’s alternatives to convey their relative attractiveness. Maximizing someone’s expected
utility automatically determines a player’s most preferred option. In recent years, however, some
doubt has been raised about whether people actually behave in accordance with these axioms,
and alternative axioms have been proposed.