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What is Game Theory?

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2 June 2014

While many people find games to be endlessly entertaining, game theory is not as purely recreational as the name suggests.  At its most basic, game theory is a study of strategic decision-making.  Mathematical models are built using game theory to explain the interactions between two or more rational decision-makers.

A way to better understand basic game theory is to look at a classic example: the prisoner’s dilemma. This “game” examines how two “players” will make a decision based on an understanding of motives and strategies.

Two players are accused of a crime.  If both agree to keep quiet and neither confesses to the crime (known as “cooperation” in game theory terms), both will receive a punishment of five years in prison.  If, however, one takes a deal offered to him and confesses (known as “defection” from the cooperative relationship”), he will be released while the other suspect will get a 20-year sentence.  Finally, if both defect from the agreement and both confess, each will receive a 10-year punishment.

Seemingly, both players would benefit the most by cooperating with each other.  But, with the chance to go free, both players know that the other must be considering the option to maximize their personal payoff.  But, if both defect, both receive a harsher punishment.  This is the prisoner’s dilemma.  The most common conclusion is that confessing is the rational choice because each party must assume that the other will only act in his own best interest.
Reluga explains, “In mathematics, we try to make models that capture part of reality and study those models.  The models have to start with a set of assumptions.  Game theory assumes that people are trying to maximize their payoff.”

There are some limitations to the theory.  It is extremely difficult to isolate and account for every factor and variable that may influence an individual’s strategy.  And there is really no way to account for the “x-factor” in human behavior.  Sometimes, it is even hard to tell what it means for a person to behave rationally.  However, setting parameters and validating behavioral models is becoming more feasible with the increasing availability of “big data.”  There is certainly more work to be done, but the methodologies are improving and, as they do, there will be more and more applications across disciplines.