Schelling’s Reorientation of Game Theory: Toward a Theory of Interdependent Decisions

In this chapter with a history of economic thought approach aims at showing that throughout his work, Schelling was building a theory of interdependence that he saw as the core of economics. We demonstrate that his work invites ontological thinking on the nature of games and strategic interactions. Schelling assessed the mathematical constraints imposed on game theory and called for the opening up of game theory not only to economics but also to other social sciences such as psychology, sociology, history, and law. Schelling’s reorientation of game theory provides the methodological foundation for endogenization and elicitation of players’ beliefs in games, which are ignored by most contemporary game theorists. We thus show that Schelling offered conceptual and methodological solutions to some of the main game theoretic shortcomings, although these solutions were not formalized. He anticipated some of the major weaknesses of contemporary game theory, such as its inadequacy as a tool to account for the convergence of players’ beliefs, which ultimately justifies the existence of an equilibrium.