Theory of Games and Economic Behavior

Theory of Games and Economic Behavior
source
Title	Theory of Games and Economic Behavior
Authors	John von Neumann, Oskar Morgenstern
Publisher	Princeton University Press
Publication date	1944

Contents

Theory of Games and Economic Behavior is a seminal work written by John von Neumann and Oskar Morgenstern, first published in 1944 by Princeton University Press. This book laid the foundation for Game Theory, a field that has been widely applied in Economics, Politics, Sociology, and Biology, influencing thinkers such as Milton Friedman, Gary Becker, and Robert Axelrod. The work has been praised by Nobel laureates like Paul Samuelson and Kenneth Arrow for its rigorous mathematical approach to understanding strategic decision making. It has also been recognized by institutions such as the University of Chicago and the Massachusetts Institute of Technology for its impact on the development of Microeconomics and Macroeconomics.

Introduction to Game Theory

Game Theory, as introduced by John von Neumann and Oskar Morgenstern, is the study of how people make decisions when the outcome depends on the actions of multiple individuals or parties, such as in Auctions, Negotiations, and Competitions. This field has been influenced by the works of Adam Smith, David Hume, and Immanuel Kant, and has been applied in various contexts, including Business, Politics, and International Relations, by scholars like Joseph Schumpeter, Friedrich Hayek, and John Maynard Keynes. The concept of the Prisoner's Dilemma, developed by Merrill Flood and Melvin Dresher, is a classic example of a game theoretical problem, which has been discussed by Robert Trivers and Garrett Hardin in the context of Evolutionary Biology and Ecology. Game Theory has also been used to analyze the behavior of Firms in Oligopolies, as studied by Augustin Cournot and Joseph Bertrand.

The development of Game Theory was influenced by the works of Émile Borel, John Nash, and Ragnar Frisch, among others, and was shaped by the intellectual environment of the University of Vienna and the Institute for Advanced Study. The book "Theory of Games and Economic Behavior" built upon earlier works, such as Daniel Bernoulli's theory of Expected Utility, and was later expanded upon by scholars like Leonid Hurwicz, Stanley Reiter, and Kenneth Mount. The Cold War and the development of Nuclear Deterrence also played a significant role in the development of Game Theory, with scholars like Thomas Schelling and Herman Kahn applying game theoretical concepts to International Relations and Strategic Studies. The work of John von Neumann and Oskar Morgenstern has been recognized by institutions such as the National Academy of Sciences and the American Economic Association.

Key concepts in Game Theory include Strategies, Payoffs, and Equilibria, as defined by John Nash and Reinhard Selten. The concept of Nash Equilibrium, developed by John Nash, is a central idea in Game Theory, and has been applied in various contexts, including Auctions and Competitions, by scholars like William Vickrey and Roger Myerson. Other important concepts include Pareto Optimality, developed by Vilfredo Pareto, and Arrow's Impossibility Theorem, developed by Kenneth Arrow. Game Theory has also been influenced by the works of Abraham Wald and Jacob Marschak, and has been applied in fields such as Computer Science and Artificial Intelligence, by scholars like Marvin Minsky and John McCarthy.

Game Theory has numerous applications in Economics, including the study of Oligopolies, Monopolies, and Competitive Markets, as analyzed by Augustin Cournot, Joseph Bertrand, and Léon Walras. The concept of Asymmetric Information, developed by George Akerlof, Michael Spence, and Joseph Stiglitz, is also crucial in understanding many economic phenomena, such as Adverse Selection and Moral Hazard. Game Theory has also been used to study International Trade, Financial Markets, and Public Policy, by scholars like Paul Krugman, Gregory Mankiw, and Joseph E. Stiglitz. The work of John von Neumann and Oskar Morgenstern has been recognized by institutions such as the Federal Reserve and the International Monetary Fund.

The mathematical foundations of Game Theory are based on Linear Algebra, Calculus, and Probability Theory, as developed by André Weil, Laurent Schwartz, and Andrey Kolmogorov. The concept of Expected Utility, developed by Daniel Bernoulli, is a fundamental idea in Game Theory, and has been applied in various contexts, including Decision Theory and Risk Analysis. Game Theory also relies on Combinatorial Game Theory, developed by John Conway, and Evolutionary Game Theory, developed by Robert Axelrod and William Hamilton. The work of John von Neumann and Oskar Morgenstern has been influential in the development of Operations Research and Management Science, by scholars like George Dantzig and Patrick Blackett.

Despite its influence, Game Theory has faced criticisms and limitations, including the assumption of Rationality and the neglect of Behavioral Factors, as pointed out by Herbert Simon and Daniel Kahneman. The concept of Bounded Rationality, developed by Herbert Simon, is an attempt to address these limitations, and has been applied in various contexts, including Organizational Behavior and Marketing. Game Theory has also been criticized for its lack of Empirical Support and its failure to account for Institutional Factors, as argued by Douglass North and Oliver Williamson. The work of John von Neumann and Oskar Morgenstern has been recognized by institutions such as the American Psychological Association and the Society for Industrial and Applied Mathematics. Category:Game Theory