While other economic theories try to predict markets Game Theory asks a different question how do people behave when their success depends on others choices, someone might choose to protect themselves at the expense of the other. As a result, both might find themselves in a worse state than if they had cooperated with each other in the decision-making process.
let's start with the most famous example the prisoners dilemma A prisoner's dilemma is a situation where individual decision-makers always have an incentive to choose in a way that creates a less than optimal outcome for the individuals as a group.
A typical example is two criminals called James and John both of them are arrested and separated in a different prison cell each of them was given two choices either they stay silent or betray their partners.
Now both of them are neither friends or brothers just casual partners nothing serious attached therefore if both of them stay silent and don't confess they both get one year in prison
But if both betray each other and confess they get 5 years each but if one betrays and confesses while the other stays silent the betrayer goes free while their partner gets 1 year.
the rational choice for each criminal is to betray their partner but here's the twist if both make this rational choice they end up worse off than if they decided to cooperate this simple game explains everything.
from buying, selling and producing arms to price Wars for business organizations and also climate change
companies might all benefit from keeping prices high but each has an incentive to undercut the others by reducing prices and taking massive profits and getting more customers which also comes as a detriment to other companies since they will lose customers and lose profits.
countries might benefit from reducing carbon emissions but each has an incentive to keep polluting While others cut back it's the tragedy of rational self-interest.