Chapter 3: Game theory: problems of working together
In Chapter 2, we have seen how the high standards of living characteristic of modern societies emerge from the complex collaboration of their members. Division of labor, roundabout production, and the production of knowledge all exemplify the kinds of interdependencies that make us prosperous. All this complexity and interdependence also creates opportunities to "game the system," and for that reason we now turn to the study of game theory. As we noted in Chapter 1, the term game theory is not the best description of the field. Both Robert Aumann and Thomas Schelling have said at different times that what we call "game theory" would be better described as "interactive decision theory." In our "closely woven web of mutual dependence," each of us makes decisions that affect the activities and well-being of others, so interactive decision theory is crucial for our understanding of economics, and plays a great role in recent economic ideas and research. Game theory has two major subdivisions: non-cooperative and cooperative game theory. In cooperative game theory, we assume that people can always make and carry out agreements to choose a joint course of action, either to obtain mutual benefit from their joint action or to "gang up" on other groups. In non-cooperative game theory we assume that people can make and carry out agreements of that kind only if there is some enforcement of the agreement, such as a legally enforceable contract.
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