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Summary on game theory

Topic: Game theory
by Herschell, 2018 Cohort

Note: This entry was created in 2018, when the task was to “summarise a key reading”, and so may not represent a good example to model current primer entries on.

Introduction#

Game theory is a method of applied mathematics used to study the decision-making processes of rational beings (humans, animals, computers). This primer will focus on humans. Some game theorists believe that by finding the equilibria of games, they can predict how actual human populations will behave when confronted with situations analogous to the game being studied. [1] This belief is extended to economic institutions.

Criticisms of game theory focus on how its methods assume that humans are rational and self-serving. Real people are more complex than players in games, as there may be many interconnected factors influencing their every decision. Thus, game theory models may not accurately predict behaviour.

This primer will address whether or not game theory is defeated by the complexity of real world situations through examining the Prisoners Dilemma.

The Prisoners Dilemma#

This game involves two prisoners. The prosecutor doesn’t have enough evidence to convict either prisoner. The Prisoners could either cooperate by remaining silent, or betray by confessing the crime of the other prisoner. The picture above shows what would happen to the prisoners depending on their chosen action.

The game provides an iconic game theory strategy: because betraying a player offers a greater reward than cooperating, all rational self-interested prisoners will betray the other, meaning the only possible outcome for two rational prisoners is to betray each other.

Application in Psychology#

Addiction can be modelled as PD problem with the players being ones present and future self. Cooperating is refraining and betraying is relapsing. If the addict cooperates in the present and in the future, they would achieve successful rehabilitation. However, if the addict cooperated today and relapsed tomorrow, they would receive the worst outcome. This is because the effort they put into refraining today would’ve been wasted. Thus, the addict would likely to keep betraying by relapsing as to avoid suffering today just to relapse again tomorrow.

There are obvious problems here. The model doesn’t take into account the physical and mental benefits of abstaining today. It also fails to take into account factors such as encouragement from the addicts support network, which will play into their decision making of whether or not they will relapse.

Application in Economics#

Advertising is a PD game with the players being two firms that are advertising to the same consumers. One firms advertising aggression directly affects the other firms advertising effectiveness. The firms cooperate by both reducing their advertising aggression. This would lead to a reduction in adverting costs for both players. However, if one firm chooses to betray and advertise aggressively, they would have a wildly successful campaign, leaving the other player very disadvantaged.

US cigarette firms had adopted the above analysis when planning their marketing strategies.

Verdict#

Game theory cannot perfectly predict human decision-making. However, it is not completely defeated by the complexities in real world situations that are ignored by its simplifying assumptions. It is still a useful tool, especially in business and economics, where agents tend to rationality and are largely self-interested.

Explore this topic further#

• Wikipedia page{.link-ext target=”_blank”}
• Prisoner’s dilemma{.link-ext target=”_blank” } as a classic example of Game Theory
• Why do competitors open their stores next to one another? Jac de Haan on TED-ed (4 mins) a great introduction to Hotelling’s Law{.link-ext target=”_blank” }, explaining why similar shops set up next to one another YouTube{.link-ext target=”_blank”}
• Hendricks, V., Hansen, P. and Aumann, R. (2007). Game theory. [Copenhagen]: Automatic Press VIP.

Return to Game theory in the Primer

Disclaimer#

This content has been contributed by a student as part of a learning activity.
If there are inaccuracies, or opportunities for significant improvement on this topic, feedback is welcome on how to improve the resource.
You can improve articles on this topic as a student in "Unravelling Complexity", or by including the amendments in an email to: Chris.Browne@anu.edu.au

Note: This entry was created in 2018, when the task was to “summarise a key reading”, and so may not represent a good example to model current primer entries on.

Introduction#

Game theory is a method of applied mathematics used to study the decision-making processes of rational beings (humans, animals, computers). This primer will focus on humans. Some game theorists believe that by finding the equilibria of games, they can predict how actual human populations will behave when confronted with situations analogous to the game being studied. [1] This belief is extended to economic institutions.

Criticisms of game theory focus on how its methods assume that humans are rational and self-serving. Real people are more complex than players in games, as there may be many interconnected factors influencing their every decision. Thus, game theory models may not accurately predict behaviour.

This primer will address whether or not game theory is defeated by the complexity of real world situations through examining the Prisoners Dilemma.

The Prisoners Dilemma#

This game involves two prisoners. The prosecutor doesn’t have enough evidence to convict either prisoner. The Prisoners could either cooperate by remaining silent, or betray by confessing the crime of the other prisoner. The picture above shows what would happen to the prisoners depending on their chosen action.

The game provides an iconic game theory strategy: because betraying a player offers a greater reward than cooperating, all rational self-interested prisoners will betray the other, meaning the only possible outcome for two rational prisoners is to betray each other.

Application in Psychology#

Addiction can be modelled as PD problem with the players being ones present and future self. Cooperating is refraining and betraying is relapsing. If the addict cooperates in the present and in the future, they would achieve successful rehabilitation. However, if the addict cooperated today and relapsed tomorrow, they would receive the worst outcome. This is because the effort they put into refraining today would’ve been wasted. Thus, the addict would likely to keep betraying by relapsing as to avoid suffering today just to relapse again tomorrow.

There are obvious problems here. The model doesn’t take into account the physical and mental benefits of abstaining today. It also fails to take into account factors such as encouragement from the addicts support network, which will play into their decision making of whether or not they will relapse.

Application in Economics#

Advertising is a PD game with the players being two firms that are advertising to the same consumers. One firms advertising aggression directly affects the other firms advertising effectiveness. The firms cooperate by both reducing their advertising aggression. This would lead to a reduction in adverting costs for both players. However, if one firm chooses to betray and advertise aggressively, they would have a wildly successful campaign, leaving the other player very disadvantaged.

US cigarette firms had adopted the above analysis when planning their marketing strategies.

Verdict#

Game theory cannot perfectly predict human decision-making. However, it is not completely defeated by the complexities in real world situations that are ignored by its simplifying assumptions. It is still a useful tool, especially in business and economics, where agents tend to rationality and are largely self-interested.