Theory of Games and Economic Behavior

• 1. Introduction

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  Theory of Games and Economic Behavior appeared in 1944 from Princeton University Press, and economists had rarely seen anything quite like it. John von Neumann was a mathematician; Oskar Morgenstern was an economist. Together they argued that a fundamental gap ran through economic theory. Standard economic tools treated each decision as if it were made in isolation. But many decisions are not isolated. They occur in situations where each player watches every other, and where the optimal move depends on what rivals are expected to do. Princeton University Press would later call the result "the classic work upon which modern-day game theory is based." How the two men built that framework is a story that begins not in economics departments, but in the mathematics of board games.

• 2. The 1928 Foundation

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  Von Neumann published "Zur Theorie der Gesellschaftsspiele" in 1928. The title translates to "On the Theory of Board Games." The paper built a mathematical framework for reasoning about strategic play. The 1944 book drew on this earlier work, applying its formal methods to the open-ended problems of economic life. A board game has fixed rules, defined players, and clear outcomes. The economy rarely does. Adapting the mathematics to fit economic reality required tools that the 1928 paper had not needed to develop. The book that resulted would, in economists' judgment, stand alongside the most significant texts the discipline had produced.

• 3. A Map of Strategy

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  The book opens with the Formulation of the Economic Problem, then moves to a General Formal Description of Games of Strategy. From there it builds outward. Zero-sum games come first: contests where one player's gain is exactly another's loss. A full chapter covers the two-person case; others address three-person games and then the general N-person version. A further chapter is devoted to four-person zero-sum games. The book also addresses what happens when the number of participants reaches five or more. Later chapters turn to Composition and Decomposition of Games, Simple Games, and General Non-Zero-Sum Games. The final chapter examines Extensions of the Concepts of Domination and Solution. Richard Stone's eventual verdict on the book would reach for the biggest benchmark in the economics profession.

• 4. Utility and Probability

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  The Second Edition of 1947 added an appendix devoted to the axiomatic treatment of utility. Von Neumann and Morgenstern derived expected utility from foundational axioms. In doing so, they assumed that all agents share the same objective probability distribution. This was a mathematical convenience rather than a description of how people actually form their beliefs. Von Neumann and Morgenstern themselves noted that a theory of subjective probability could also be grounded in their framework. That task fell to others. Jimmie Savage completed it in 1954, extending the original axioms so that probability itself could emerge from individual preferences rather than being assumed in advance. Johann Pfanzagl extended the line further in 1967. Savage also applied Bayes' theorem to update these subjective probabilities as new information arrived, linking rational choice theory directly to statistical inference. The framework's claims about rational behavior were precise enough to invite a verdict from economists who engaged with it closely.

• 5. Three Economists Respond

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  Richard Stone concluded that Theory of Games and Economic Behavior was the most important publication in economics since John Maynard Keynes. Stone had in mind Keynes's The General Theory of Employment, Interest and Money, which had appeared in 1936. Arthur Herbert Copeland shared Stone's enthusiasm, describing the book as an important advance toward making economics an exact science. Herbert A. Simon also offered his praise. Copeland's phrase pointed to where the 1944 book stood in the discipline. It was not a contribution to a science already exact. It was a step toward making it so.