Welcome to Basics of Game Theory! Before we jump into the core concepts, I would love to learn a little about you.

To help me tailor this session, could you tell me a bit about your background? For example, are you a student, a professional, or just curious about the topic? Also, what specifically sparked your interest in Game Theory?

It's great to have you here! Curiosity is the absolute best reason to learn game theory, as it turns out to be a fascinating lens for looking at everything from social choices to economics.

What is Game Theory?

At its core, Game Theory is the study of strategic interdependence—situations where the outcome of your choice doesn't just depend on what you do, but also on what other people choose to do.

Unlike making a decision in isolation—like deciding whether to bring an umbrella based purely on the weather forecast—game theory kicks in when you are making decisions against other active decision-makers who are also reacting to you.

To analyze any strategic situation, game theorists break the scenario down into four core building blocks using the acronym PAPI: Players, Actions, Payoffs, and Information.

Let's use a penalty kick in soccer to see how each piece fits together:

• Players: The decision-makers in the game (the kicker and the goalkeeper).
• Actions: The choices available to each player (kicking left vs. right; diving left vs. right).
• Payoffs: The outcome or benefit each player receives (scoring a goal vs. making a save).
• Information: What each player knows when making their decision (the kicker and keeper must choose at the exact same time without knowing the other's choice).

Now that we have covered how PAPI sets up a game, the next crucial distinction is whether players can make binding agreements: the difference between cooperative and non-cooperative game theory.

In a cooperative game, players can form coalitions, sign legally binding contracts, or make enforceable promises to coordinate their choices for mutual benefit.

In a non-cooperative game, players act independently. Even if they talk or try to agree on a plan, there is no external authority or binding contract to enforce the agreement, so every player will only stick to a plan if it remains in their own self-interest.

• Cooperative Example: Two tech companies forming a joint venture to share research and development costs. They sign an enforceable contract binding them to share profits and split expenses, so their agreement holds legally.
• Non-Cooperative Example: Two rival gas stations across the street from each other engaged in a price war. They cannot legally enforce a secret agreement to fix prices high, so each station independently cuts prices to try to steal the other's customers.

In short: cooperative games focus on what groups can achieve through binding agreements, while non-cooperative games focus on what individual players do when relying strictly on self-enforcing strategies.