Two suspects are interrogated separately. Each can confess or stay silent. If both stay silent, they get light sentences. If one confesses and the other does not, the confessor goes free and the other gets a heavy sentence. If both confess, both get moderate sentences. This is the prisoner's dilemma, the most famous problem in game theory, and it captures a basic truth: rational individual choices can produce bad collective outcomes.

Game theory studies strategic interactions, situations where each person's payoff depends on what others do. It was developed by John von Neumann and Oskar Morgenstern in the 1940s and expanded by John Nash, whose equilibrium concept won a Nobel Prize. Today it is used in economics, political science, biology, and military strategy.

Real-world applications are everywhere. Auction design, labor negotiations, pricing wars between airlines, arms races between nations. The theory does not always predict perfectly, because people are not always rational and games are often more complex than models assume. But it provides a language for thinking about conflict and cooperation, and that language has proven remarkably useful.

Key concepts

• Players, strategies, and payoffs
• Nash equilibrium
• Prisoner's dilemma
• Zero-sum versus positive-sum games
• Repeated games and cooperation