Games with incomplete information: Nobel Memorial Lecture

Abstract

Game theory is a theory of strategic interaction. That is to say, it is a theory of rational behavior in social situations in which each player has to choose his moves on the basis of what he thinks the other players’ countermoves are like-ly to be. After preliminary work by a number of other distinguished mathematicians and economists, game theory as a systematic theory started with von Neumann and Morgenstern’s book, Theory of Games and Economic Behavior, published in 1944. One source of their theory was reflection on games of stra-tegy such as chess and poker. But it was meant to help us in defining rational behavior also in real-life economic, political, and other social situations. In principle, every social situation involves strategic interaction among the participants. Thus, one might argue that proper understanding of any social situation would require game-theoretic analysis. But in actual fact, classical economic theory did manage to sidestep the game-theoretic aspects of economic behavior by postulating perfect competition, i.e.