Game theory is the science behind human strategy. It is the study of how humans attempt to second-guess each other's actions, and what the ultimate consequences will be. As such, it has become one of the most influential economics ideas of recent decades. Adam Smith argued in the 18th century that humans are inherently selfish, but that when this selfishness is channeled through a market, the end result will be to make society better-off. Game theory, by contrast, examines how people's selfishness informs the way they bargain with each other.

The Prisoner's Dilemma

The classic model of game theory posits a prison, where two accomplices to a crime are interviewed separately from each other. They have two options: either confess to the crime or stay silent. If one confesses and his partner in crime stays silent, the confessor will be given a complete acquittal, while his accomplice will face a jail term of ten years. If both stay silent they will each receive a token one-year sentence. If both confess they will be imprisoned for five years.

The mathematics indicates that the most sensible option for both would be to stay silent. However, one of the precepts of game theory is that individuals' selfishness means they will invariably both betray each other, since the incentive to avoid the longest jail sentence, plus the chance of getting off for free, are more compelling than taking the gamble of remaining silent and being betrayed by one's accomplice. The point is that in certain circumstances the best decision is not always the obvious one.

What, though, if the prisoner's dilemma is repeated over and over again? In such circumstances, where the prisoners know the parameters of the game, they can learn that cooperation is more beneficial a tactic than betrayal. Similarly, when this dilemma has been used as an experiment, it has occasionally highlighted people's propensity to choose the altruistic path of remaining silent.

Another example of game theory is to be found in the James Dean classic movie Rebel Without a Cause, where the protagonist takes on an opponent in a game of 'chicken', in which they race cars towards a cliff -- the loser being the first to jump out of his speeding car. Although they are seeking the best outcome for themselves, they risk the worst -- their own death.

The art of second-guessing However, game theory is a much broader study than such examples suggest. It examines how humans behave in any 'game-like' scenario -- as opposed to those where no strategy is involved. What these scenarios have in common is that the actions of one participant invariably influence the outcome not only for themselves but for others. This can include zero-sum games where the interests of each participant clash such that one person's win is another's loss, or games with a win-win outcome.

Key to the theory is the fact that in such circumstances people are forced to second-guess another rational, self-interested human's intentions. Given how widely strategic interdependence applies to human interaction, game theory has become an extremely influential and frequently applied discipline, used in politics, economics and commerce. Bankers employ it when working on takeovers, employers and trades unions when engaged in wage disputes, politicians when negotiating, for example, on international trade agreements -- or most controversially, when considering whether or not to go to war -- and companies use it when determining how to price their products and outsell their rivals.

War Games

One of the earliest and most controversial applications of game theory was during the Cold War. Both the Soviet Union and the US had nuclear weapons capable of causing massive devastation to each other's countries; both knew that to fire one would result in mutually assured destruction; in other words, that their opponent would launch missiles in response. Indeed, philosopher Bertrand Russell likened the nuclear stand-off to a game of chicken.

In his classic 1960 book The Strategy of Conflict, Thomas Schelling explored how game theory would motivate the Soviet Union and the US to respond to each other. One of his striking conclusions was that countries facing such a stand-off would be better placed attempting to protect their weapons rather than their people. The rationale is that a country that believed it could withstand the consequences of nuclear war would be the most likely to start one. So, said Schelling, rather than building nuclear shelters for everybody, it would be better to demonstrate your ability to strike back with force if your opponent should launch a warhead in your direction. Such insights influenced the way the Cold War opponents approached the art of brinksmanship -- persuading them, for instance, to put warheads in submarines rather than just in static land sites. The problem, in this case, was that neither side knew how many missiles the other had nor where they were located or aimed, but such uncertainty only perpetuated the stand-off.

Science or Art

A classic game theory experiment is one most of us have played: chess. Whenever we play strategic games we take decisions based on what we anticipate our opponent will do. The number of possible moves at any one stage of the game, however, is almost infinite, so there is little option but to think a few moves ahead and rely on both experience and intuition to fill in the rest of the gaps.

Game theory remains one of the most fast-developing areas of economics, and is increasingly helping to uncover fundamental truths about human behavior. However, in the words of one of its leading experts, Avinash Dixit of Princeton University, "The theory is far from complete, and in many ways the design of successful strategy remains an art."