GAME THEORY

Some authors said Game Theory was probably born with the publication of The Theory of Games and Economic Behaviour by John Von Neumann and Oskar Morgenstern which is published in 1944. They defined 'a game as any interaction between agents that is governed by a set of rules specifying the possible moves for each participants and a set of outcomes for each possible combination of moves'.  One is hard put to find an example of social phenomenon that cannot be so described. Thus a theory games promises to apply to almost any social interaction where individuals have some understanding of how the outcome for one is affected not only by his or her own actions but also by the actions of others. Through game theory they believe that game theory reveals the limits of 'rational choice' and of the (neoclassical) economic approach to life. 

In Game Theory there is three key assumption: 

(1) Agents are instrumentally rational

(2) They have common knowledge of this rationality (CKR)

(3) They know the rules of the game. 

Instrumental Rationality

Instrumental rationality is identified with the capacity to choose actions which best satisfy a person's objectives. Instrumentally rational is seen on how expectations regarding what others will do are likely to influence what it is rational for you to do. Max weber famously sees purposive rational action as one of the ideal types through which we can develop a rational understanding of individual action; and he regards the way that western instituitions increasingly embody the character of calculative reason as one of the hallmarks of 'modernity'. 

Game Theorists commonly turn to the Nash Equilibrium solution concept named after its founder John Nash (Nash Bargaining Solution). The basic idea behind this concept is that rational players should not want to change their strategies if they knew what each of them had chosen to do. (which means they will change the strategies if they did not knew each of them had chosen to do?). 

This solution concept helps to refine the prediction of Game Theory. However, there is a cost in terms of generality. The step to Nash seems to require rather more than the assumptions of rationality and CKR, which is need the essence of the extra requirement: the assumption that players' belief will be consistently aligned (CAB). In other words they assume that everybody's beliefs are consistent with everybody else's. 

The notion of consistent alignment of beliefs (CAB) means that no instrumentally rational person can expect another similarly rational person who has the same information to develop different thought processes or in simple sentence that no rational person expects to be surprised by another rational person. The point is that if the other person's thought is genuinely moving along rational lines, then since you know the person is rational and you are also rational then your thoughts about what your rational opponent might be doing will take you on the same lines as his or her own thoughts. Bear in mind that this does not mean that everything can be deterministically predicted. For example, both you and others may be expecting good weather with probability 3/4. In that sense your beliefs are consistently aligned. Yet it rains. You may be disappointed but you are not surprised, since there was always a 1/4 chance of rain. What partially underpins the jump from CKR to CAB is the so-called Harsanyi doctrine. This follows from John Harsanyi's famous declaration that when two rational individuals have some information, they must draw the same inferences and come, independently. to the same conclusion.

Actually, Game theory is a mathematical technique that used to analyzes behaviour of decision maker whereas players (1) are trying to achieve the optimal position through the game or strategic action, (2) very be careful on gaming, and (3) interdependent of action between players.

Get more understanding about Game Theory...you may try this book "Game Theory by Shaun P.Hargreaves Heap & Yanis Varoufakis.