You’re at a bar. Or maybe a boardroom. It doesn't really matter where you are, because the situation is always the same: you want something, someone else wants something, and your success depends entirely on what that other person decides to do. Most people call this "life." Mathematicians call it a game. Honestly, an explanation of game theory isn't about board games or Xbox; it’s the cold, hard math of strategy. It’s about why people cooperate when they hate each other and why they betray each other when they should probably work together.
It's weird. We think we're being logical, but we're often just following a script written by probability.
The whole field blew up thanks to John von Neumann and Oskar Morgenstern back in 1944. They wrote Theory of Games and Economic Behavior, which is a massive, dry book that basically changed how we understand human interaction. Then John Nash—the guy from A Beautiful Mind—showed up and proved that in any competitive situation, there’s a point where nobody can improve their own situation by changing their strategy alone. We call that the Nash Equilibrium. It sounds fancy. It’s actually just a fancy way of saying "stalemate where everyone is doing the best they can, even if it sucks."
The Prisoner's Dilemma is Kinda Overrated (But Essential)
If you’ve ever heard an explanation of game theory, you’ve heard about the Prisoner’s Dilemma. It’s the classic. Two criminals get caught. The cops put them in separate rooms. If both stay quiet, they get a light sentence. If one rats the other out, the snitch goes free while the partner gets ten years. If they both rat each other out, they both get five years.
Logic says they should both stay quiet. But the math? The math says you’re a fool if you don’t snitch.
Why? Because no matter what your partner does, snitching improves your individual outcome. If he stays quiet, you go free instead of getting a year. If he snitches, you get five years instead of ten. This is what's known as a "dominant strategy." It’s also why your favorite local coffee shop and the giant Starbucks across the street both spend way too much on advertising. If neither advertised, they’d both save money and keep their customers. But if Starbucks advertises and the local shop doesn't, the local shop dies. So they both spend the money. They’re stuck. It’s a race to the bottom that feels like progress.
Zero-Sum vs. Non-Zero-Sum
Not everything is a fight to the death. A zero-sum game is poker. For you to win a dollar, I have to lose a dollar. $1 + (-1) = 0$. Total wealth doesn't change; it just moves around. Most people view the world through this lens. They think if their coworker gets a promotion, they’ve lost something.
But real life is mostly non-zero-sum.
Trade is non-zero-sum. I have an apple and I want an orange. You have an orange and you want an apple. We swap. Now we’re both happier. The "total value" in the system went up. Understanding the difference between these two is basically the secret to not being a miserable person to work with. If you treat a non-zero-sum situation (like a marriage or a business partnership) like a zero-sum game, you will eventually lose. Every single time.
Coordination Games and the Battle of the Sexes
There's this thing called the "Battle of the Sexes" in game theory circles. Don't blame me; the name is from the 1950s. Imagine a couple. One wants to go to a boxing match, the other wants the opera. They both prefer being together over being alone. If they go to separate events, they both get zero utility. If they agree on one, one person is thrilled and the other is just "okay," but it's better than nothing.
The "game" here isn't about beating the other person. It's about signaling.
In business, this happens with technical standards. Should we use USB-C or Lightning? Blu-Ray or HD-DVD? It doesn’t necessarily matter which one wins, as long as everyone picks the same one. Once a standard is set, the "players" are incentivized to stick to it because the cost of switching alone is too high. This is why you're still using a QWERTY keyboard even though it was designed to slow down typists so old mechanical keys wouldn't jam. We’re all trapped in a coordination game that was decided 150 years ago.
The Problem with Being "Rational"
Game theory assumes people are "rational actors." That’s a huge assumption. Like, massive.
In the real world, people are messy. We have egos. We get tired. We have "bounded rationality," a term coined by Herbert Simon. We don't have all the information, and even if we did, our brains aren't powerful enough to calculate every possible outcome of a 10-step negotiation while we're also wondering if we left the stove on.
The Ultimatum Game
Here’s a real-world experiment that breaks standard game theory. I give you $100. You have to offer a portion of it to a stranger. If they accept, you both keep the money. If they reject it, nobody gets anything.
🔗 Read more: The Purpose of Trump Tariffs: What Most People Get Wrong
Pure math says you should offer $1. The stranger should accept it because $1 is better than $0.
But in real life? If you offer $1, the stranger will almost certainly tell you where to shove it. They’d rather lose a dollar just to punish you for being a jerk. We have an evolved sense of fairness that game theory struggles to quantify. We aren't just trying to maximize our "utility" in dollars; we're maximizing our status, our self-respect, and our reputation.
Evolutionary Game Theory: Why Nature is Brutal
Biologists like John Maynard Smith realized that game theory explains why animals behave the way they do. Take the "Hawk-Dove" game. It explains why animals don't fight to the death every time they see a rival.
- Hawks always fight. They win big or get seriously injured.
- Doves posturing and then retreat if things get violent. They never get hurt, but they lose resources to Hawks.
If a population is all Doves, a single Hawk will dominate and reproduce like crazy. But if a population is all Hawks, they’ll all kill each other, and a single Dove will actually do better by just staying out of the way. Nature finds an equilibrium. Usually, it’s a mix. This explains why "assholes" and "nice guys" both exist in the same human social circles. Both strategies are viable depending on how many people are using the other one.
Applying This to Your Actual Life
If you want an explanation of game theory that actually does something for you, look at your recurring interactions.
In a one-off game, it usually pays to be selfish. If you're never going to see someone again, you can "defect" (snitch/cheat) and win. But life is an "Iterated Prisoner's Dilemma." We play the same people over and over again.
Robert Axelrod ran a famous tournament where computer programs played the Prisoner's Dilemma thousands of times. The winner wasn't some complex, predatory AI. It was a simple strategy called Tit-for-Tat.
- Start Nice: Cooperate on the first move.
- Be Provocable: If the other guy cheats, you cheat back immediately.
- Be Forgiving: If they go back to cooperating, you cooperate again.
- Be Clear: Don't be too clever. Let the other person know exactly how you play.
This strategy wins because it builds trust but refuses to be a doormat. It’s the ultimate business advice hidden in a math paper.
Real-World Strategic Moves
Look at "Burning Bridges." In history, generals would sometimes burn the bridge behind their own army. Why? It seems stupid. You’re trapped! But in game theory, this is a "commitment device." By removing your own option to retreat, you change the "game" for your enemy. They realize you have to fight to the death, which makes them more likely to retreat themselves.
In a salary negotiation, the first person to name a number often loses some power. But if you can credibly commit to a "take it or leave it" position—maybe by having another job offer in your pocket—you've changed the math for the employer. You aren't just "asking" for money; you're presenting a scenario where their only "rational" move is to pay you.
Summary of Actionable Insights
- Identify the Game: Stop and ask: "Is this zero-sum or non-zero-sum?" If it's non-zero-sum, stop trying to 'win' and start trying to 'expand the pie.'
- Check the Equilibrium: If you're stuck in a bad situation (like a toxic work culture), realize that everyone might be acting rationally within a broken system. You can't change people; you have to change the payoffs.
- Use Tit-for-Tat: In your long-term relationships, be the first to trust, but don't let people walk over you. Forgive quickly when they make amends.
- Understand Signaling: People don't always do what's logical; they do what signals their value, intelligence, or loyalty. Factor that into your "math."
Game theory isn't about being a robot. It’s about realizing that we’re all connected by these invisible threads of logic. Once you see the "game" underneath the conversation, you stop reacting emotionally and start playing strategically. It’s not about being mean; it’s about being effective. Whether you’re buying a car or deciding whether to trust a new business partner, the math is always there, running in the background. You might as well learn how to read it.
To get better at this, start observing small interactions. Watch how people queue at a grocery store or how they handle a four-way stop sign. These are all mini-games. Notice who "defects" and who "cooperates." The more you see these patterns in the small stuff, the easier it becomes to spot the Nash Equilibrium in the big stuff—like your career or your investments. Start by defaulting to cooperation today and see who meets you halfway.