A Guide to Game Theory: Reading Games

“How can I learn game theory?”

That is the single most common DM I receive on Substack and X.

Usually, I refer those people to studies or books. But that’s a big investment, and the best sources aren’t often available for free either. That is without even mentioning the rigor required to understand half of them in the first place.

It’s just a lot of work.

That’s why in today’s article, I will spare you half of that work and teach you the core principles of game theory—the ones you can apply immediately. From there, you can decide whether you want to dig deeper, but that’s your call.

Today, you’ll learn strategy. We will begin with the fundamentals: what a game is and how to read it.

Contents Include:

1. What a Game Actually Is
2. The Vital Rule of Strategy
3. Scenario: A Prison and a Bill
4. Equilibrium & Solving the Game
5. Iteration (“Shadow of the future”)
6. Summary (Save This)

1. What a Game Actually Is

It’s not a metaphor at all. Whenever we speak of a game, we technically refer to a situation with three aspects:

• More than one person is making a choice (n > 1, where n represents the number of players).
• Outcomes depend on the combination of the players’ choices, so it’s not just about you. Every single player shapes how the game is played.
• Everyone tries to act as rationally as possible to maximize their payoff This means that everyone cares about the outcome. We usually don’t expect a player to say “fuck it” and proceed to go away unless that itself has a strategic value. In contexts such as behavioral game theory, we can look at the motivations of others beyond rational incentives, e.g., emotional needs and subjective desires of all sorts instead of just capital or tangible rewards

This means that you are inside a dozen different games per day, and it doesn’t really matter if you recognize that.

Ever thought about who should text first? Yeah, that’s a game too.

This is the first skill: to recognize that you are inside these games yourself. This grants you a surprising sense of agency once you internalize it.

You are a player, so you may as well act like one. Without this mindset, you cannot practice game theory.

2. The Vital Rule of Strategy

When making normal decisions, such as choosing the time for your alarm clock, you typically pick the best option: the one that gives you enough time to get ready and go to work. It’s entirely your call, and no one can truly affect this decision.

Hence, when making decisions, there is always a best option.

The same cannot be said about games.

There is no best option—only a best response. The best response depends entirely on what moves the other players commit to. Likewise, their best move is also impacted by what you do.

This “strategic interdependence” is the mathematical backbone of game theory. You perpetually respond to the game.

3. Scenario: A Prison and a Bill

Before we actually split a bill and take a look at game theory in everyday life, I should briefly go over the Prisoner’s Dilemma, possibly the most famous game in all of game theory.

Honestly, if you’re even mildly interested in game theory, then you’ve heard it repeated a million times already.

Nonetheless, I will briefly outline the essence of the game so that we can then move on to a more practical scenario.

The Prisoner’s Dilemma is wildly overrated. It’s not wrong, but it's been repeated to the point of becoming wallpaper. Knowing about it is now somehow associated with “understanding game theory.”

The setup of this game is simple: two partners in crime are arrested and separated from each other. They are interrogated in two different rooms, so they cannot communicate with each other at all.

Both prisoners can choose between two strategies: staying silent or betraying the other. This leads to three outcomes:

• The pair stays silent → 1 year in prison each
• Both betray each other → 2 years in prison each
• One betrays, the other remains silent → the betrayer walks free, the silent one gets 3 years

Don’t question the logic of this game. These are the rules, and there’s no avoiding them or “calling your lawyer.”

Under the given circumstances, the best response would be to betray. Staying silent bears the highest potential risk. By contrast, electing to defect either allows you to walk free or imprisons you for 2 years.

In every conceivable scenario, defection is a better strategy.

Now what’s the issue with it?

First off, it has led people to think that game theory is always about betrayal, which is simply false. Game theory studies the structure of a game, and this structure happens to be rather unforgiving.

Second, it’s nonsensically abstract. I had to explicitly tell you to adhere to the rules of the game so that you don’t break it. It’s therefore not a very practical game and won’t give you a real-world application.

Something of Substance: Splitting the Bill

Now let’s go over a very common horror scenario at the restaurant. You and seven other people enjoy a nice evening until someone utters a sentence that could start a war:

“So… shall we split it evenly?”

Let’s say everyone agrees because it’s easier. That’s the moment when the game transforms: the cost of what you ordered suddenly isn’t paid by you anymore. Everyone now co-funds it.

• Now your order will still cost the table full price, but you only pay a share of it.
• Upgrading to an expensive meal will therefore add $20 to the bill, but you only pay $2.50 of it. The other seven will cover the rest of the cost. That’s a subsidy of 8 to 1, and no one has to agree to it explicitly.
• So, everyone upgrades. The bill hits $240; everyone proceeds to pay $30 (the full price), and nobody gets a discount.

It’s a whole dilemma.

Think about your position. Strictly speaking, in terms of value, you would rather pick the cheap one if you had to cover the full price yourself. But the price has changed.

• If everyone now orders modestly while you order up, you pay $2.50 for a huge privilege.
• If everyone else orders up and you don’t, you fund seven other people’s dinners.

Take a close look at what that means. Ordering expensively is strictly better for you regardless of what everyone else does. If you were perfectly rational, you would order up, because it’s the best response.

In game theory, that’s called a dominant strategy: a move that’s your best response to every possible thing that could happen. It does not exist in every scenario, but when it does, it’s strictly the superior move.

The Payoff Matrix: The One Part of Math Worth Learning

Needing to describe a whole game and its payoff sucks.

Now—I promised not to bore you with math, but the payoff matrix is the one piece of notation that’s worth learning.

We use it to visualize games; it basically lists what you end up with, given every combination of your choices and the choices of other players.

Let’s get back to our bill example: this time, we take a table of 4. A cheap meal for $10, an expensive meal for $30, and the same premise as before.

But the expensive one is not worth $30 to you. Let’s say you find $20 to be a more acceptable price for it.

Let’s read it the way a game theorist does, one column at a time:

• If everyone orders cheap (left column): Order cheap → you break even at 0. Order expensive → you’re at +5. Expensive wins.
• If everyone orders expensive (right column): Order cheap → you lose 15. Order expensive → you lose 10. Expensive wins again.

The bottom row beats the top row both times. It’s a dominant strategy, so you don’t need to predict anything here, because it’s always the best response to everything thrown at you.

But what happens when everyone chooses the dominant strategy? Something about the game changes. An equilibrium emerges.

4. Equilibrium

Look at the matrix again and fix your eyes on the bottom-right corner. Everyone ordering expensive is called a “Nash equilibrium.” It’s the state where nobody can improve their payoff by changing their move.

At this point, there’s nothing you can do anymore. Go ahead and test it for yourself: switch to buying the cheap meal while everyone else gets the expensive meal.

You move from -10 to -15. Great. You’re a hero now. A hero that regularly makes very poor financial decisions.

But can we fix it?

The answer to this is… technically yes, but not really.

As stated, you cannot do anything inside the game. Everything you need to do is already settled, and no one can improve unless someone else valiantly sacrifices themselves—which is unlikely.

You can only break an equilibrium by changing (or preventing) the game. In this case, it’s one sentence: “Let’s just individually pay for what we order.”

That’s it. You have vetoed the game without anything changing.

This is a crucial lesson. When a situation produces bad outcomes, look at the rules producing that outcome (splitting the bill) before even looking at the players. Finally, you either choose to play it or to avoid it.

Whenever participating means losing something substantial without a good outlook for returns, then not participating is a winning strategy.

5. Iteration (“Shadow of the future”)

One more thing: how many times are you playing a game? Sometimes, games are not played repeatedly; those are called one-off games. In them, people tend to behave badly because there is absolutely no future in which the players will meet again, so nobody can take revenge.

The opposite of that is an iterated game. Things you do repeatedly in a friend group are an example. Players tend to behave much better in these games. Now, that’s not because they are nicer, but rather because you’ll see each other again; there exists a looming shadow of the future.

So, if you want someone to behave well, you'd better make sure you see each other again. And, of course, always be careful when an iterated game nears its end. Once the finite horizon approaches and the final round is here, it practically turns into a one-off game.

6. Summary (Save This)

You now have four pieces of vital information about game theory, and they cover most of it. To ensure that you can apply them seamlessly, here’s a summary:

1. You can now recognize the game by figuring out whether your outcome depends on someone else’s choice. If that is the case, then you’re in a game.
2. You should always come up with the best response rather than trying to make the best decision.
3. Read a payoff matrix one column at a time. Find your best response to each column.
4. Look for the equilibrium. If the equilibrium is bad for you, then you may want to reconsider whether you really are eager to join in on the game or just cut your losses and leave.

That’s it for part one. The lesson’s over.

You now know how to read the structure of simple games and avoid getting into bad positions. But what happens in more complex scenarios, when trust is at stake or when the truth is blurred?

That’s what the premium posts cover. They are your ticket to transform high-stakes games into an advantage. 20% off until September 20th. Read them on Substack: https://structuralist.substack.com/

You can also preview them here:

Embedded post:

Author: Incentivising (@incentivising) Post ID: 2094698101218893886 Source: https://x.com/incentivising/status/2094698101218893886 Posted: 2026-09-01T08:05:19.000Z Reply to: none

Text:

> https://x.com/i/article/2094696820546908160

Embedded post:

Author: Incentivising (@incentivising) Post ID: 2095487526676934838 Source: https://x.com/incentivising/status/2095487526676934838 Posted: 2026-09-03T12:22:13.000Z Reply to: none

Text:

> https://x.com/i/article/2095474873413853187