Theory of Games and Economic Behavior

Theory of Games and Economic Behavior
source
Name	Theory of Games and Economic Behavior
Author	John von Neumann and Oskar Morgenstern
Country	United States
Language	English
Subject	Game theory, Mathematical economics
Publisher	Princeton University Press
Pub date	1944
Pages	625
Isbn	0-691-04193-7

Theory of Games and Economic Behavior. This foundational 1944 treatise, authored by mathematician John von Neumann and economist Oskar Morgenstern, established the modern mathematical discipline of game theory. It provided a formal framework for analyzing strategic interactions among rational decision-makers, moving beyond the classical assumptions of neoclassical economics. The work's publication by Princeton University Press marked a paradigm shift, influencing fields from economics and political science to evolutionary biology and computer science.

Overview and historical context

The book emerged from a collaboration between the polymath John von Neumann, a central figure at the Institute for Advanced Study, and the Austrian economist Oskar Morgenstern, then at Princeton University. Its development was influenced by earlier mathematical work, including von Neumann's 1928 paper on minimax and the study of zero-sum games, as well as critiques of the prevailing expected utility theory. The intellectual climate at institutions like Cowles Commission and the RAND Corporation later became crucial for its dissemination. Published during World War II, its analytical rigor offered new tools for modeling conflict and cooperation, anticipating applications in Cold War strategy and nuclear deterrence.

Fundamental concepts and definitions

The text rigorously axiomatizes several core constructs. It introduces the formal definition of a game as a set of rules governing interactions between players with defined strategies and payoffs. A landmark contribution was the axiomatic foundation of expected utility theory, providing a consistent basis for decision-making under risk. It distinguishes between cooperative games, where binding agreements are possible, and non-cooperative games. Key mathematical objects include the characteristic function for coalitional games and the extensive form for representing sequential moves, laying groundwork for future work by scholars like John Nash.

Solution concepts and equilibrium

A primary achievement was the solution concept for zero-sum games with two players, proving the existence of a minimax solution using techniques from functional analysis and convex set theory. For cooperative games, the authors introduced the concept of a stable set, later known as the von Neumann–Morgenstern stable set, as a solution predicting which coalitions will form. While the book did not solve the general equilibrium problem for non-cooperative games, its framework directly enabled John Nash to formulate his Nash equilibrium concept. Other solution concepts explored include the notion of transferable utility and the analysis of core imputations.

Applications in economics and beyond

The work reconceptualized economic competition, modeling markets as strategic games and influencing later developments in industrial organization and auction theory. Its impact quickly spread to political science for analyzing voting systems, coalition government formation, and international relations, as seen in the work of Thomas Schelling. In biology, it provided tools for evolutionary game theory, explaining phenomena like animal conflict and evolutionarily stable strategy. Later, it became fundamental to computer science, particularly in artificial intelligence for multi-agent systems, and to modern mechanism design, a field advanced by Leonid Hurwicz and Roger Myerson.

Influence and legacy

The book is widely regarded as one of the most influential scientific works of the 20th century, catalyzing a research revolution. It earned John von Neumann the inaugural Albert Einstein Award and its methodologies were central to the work of numerous Nobel laureates including John Nash, Reinhard Selten, John Harsanyi, Robert Aumann, and Lloyd Shapley. The RAND Corporation became a major center for its application to military strategy. Its legacy endures in diverse domains, from the design of spectrum auctions by the Federal Communications Commission to algorithms in online advertising and foundational debates in behavioral economics challenging its rationality assumptions.

Category:Game theory Category:Mathematics books Category:Economics books