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Game theory is a study of strategic decision making. More formally, it is "the study of mathematical models of conflict and cooperation between intelligent rational decision-makers". An alternative term suggested "as a more descriptive name for the discipline" is interactive decision theory. Game theory is mainly used in economics, political science, and psychology, as well as logic and biology. The subject first addressed zero-sum games, such that one person's gains exactly equal net losses of the other participant(s). Today, however, game theory applies to a wide range of behavioral relations, and has developed into an umbrella term for the logical side of decision science, to include both human and non-humans, like computers.

Modern game theory began with the idea regarding the existence of mixed-strategy equilibria in two-person zero-sum games and its proof by John von Neumann. Von Neumann's original proof used Brouwer's fixed-point theorem on continuous mappings into compact convex sets, which became a standard method in game theory and mathematical economics. His paper was followed by his 1944 book Theory of Games and Economic Behavior, with Oskar Morgenstern, which considered cooperative games of several players. The second edition of this book provided an axiomatic theory of expected utility, which allowed mathematical statisticians and economists to treat decision-making under uncertainty.

This theory was developed extensively in the 1950s by many scholars. Game theory was later explicitly applied to biology in the 1970s, although similar developments go back at least as far as the 1930s. Game theory has been widely recognized as an important tool in many fields. Eight game-theorists have won the Nobel Memorial Prize in Economic Sciences, and John Maynard Smith was awarded the Crafoord Prize for his application of game theory to biology. (Source: HERE)

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The prisoner's dilemma is a canonical example of a game analyzed in game theory that shows why two individuals might not cooperate, even if it appears that it is in their best interests to do so. It was originally framed by Merrill Flood and Melvin Dresher working at RAND in 1950. Albert W. Tucker formalized the game with prison sentence rewards and gave it the name "prisoner's dilemma" (Poundstone, 1992), presenting it as follows:

Two members of a criminal gang are arrested and imprisoned. Each prisoner is in solitary confinement with no means of speaking to or exchanging messages with the other. The police admit they don't have enough evidence to convict the pair on the principal charge. They plan to sentence both to a year in prison on a lesser charge. Simultaneously, the police offer each prisoner a Faustian bargain. If he testifies against his partner, he will go free while the partner will get three years in prison on the main charge. Oh, yes, there is a catch ... If both prisoners testify against each other, both will be sentenced to two years in jail.

In this classic version of the game, collaboration is dominated by betrayal; if the other prisoner chooses to stay silent, then betraying them gives a better reward (no sentence instead of one year), and if the other prisoner chooses to betray then betraying them also gives a better reward (two years instead of three).

Because betrayal always rewards more than cooperation, rational self-interested prisoners would betray their counterparts, and the only possible outcome for two rational self-interested prisoners is for them to betray each other. The interesting part of this result is that pursuing individual reward logically leads the prisoners to both betray, but they would get a better reward if they both cooperated with each other to stay silent.

In reality, humans display a systematic bias towards cooperative behavior in this and similar games, much more so than predicted by simple models of "rational" self-interested action.

There is also an extended "iterative" version of the game, where the classic game is played over and over between the same prisoners, and consequently, both prisoners continuously have an opportunity to penalize the other for previous decisions.

If the number of times the game will be played is known to the players, the finite aspect of the game means that (by backward induction) the two prisoners will betray each other repeatedly. Game theory does not claim, however, that real human players will actually betray each other continuously. In an infinite or unknown length game there is no fixed optimum strategy, and Prisoner's Dilemma tournaments have been held to compete and test algorithms.

In casual usage, the label "prisoner's dilemma" may be applied to situations not strictly matching the formal criteria of the classic or iterative games: for instance, those in which two entities could gain important benefits from cooperating or suffer from the failure to do so, but find it merely difficult or expensive, not necessarily impossible, to coordinate their activities to achieve cooperation. MORE AT THIS LINK.

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