Definition and Applications
The Article below was assigned to one of this year’s summer Interns, Anna Demetriou, and was written with the help and close supervision of our Team. Anna will soon attend her second year at the University of Newcastle, UK. Ultimately, it has provided an opportunity for both the intern to enhance her knowledge through research, as well as writing skills, while our Company gained insight from a piece of writing of academic nature, which assesses real-life applications of an all-famous economic theory of the 20th century. The Article emphasizes on presenting the development of the Game Theory through the decades, from a purely Economic theorem originally, to its commercialisation and expansion of application to numerous real-life case studies, without even realising it, as it has been proven to constitute a part of everyday behavioural nature in humans and animals. This Article perfectly complements our previous Article of Newsletter 45, associated with the “Prisoner’s Dilemma”. It forms a short, simple, yet effective piece of writing, which allows for a pleasant informative read on a timeless subject.
Game theory refers to the study of mathematical models of strategic interaction, or at least the optimal decision-making of independent and competing actors in a strategic setting. It has applications in all areas of social science, as well as in politics, in logic, in systems science and computer science. That is, zero-sum games, where each player’s gains or losses are exactly balanced by those of the other players, or non-zero-sum games, where decision-making may result in all participating players being mutually better off, or worse off, than originally. Game theory is currently an umbrella term for the science of studying logical decision-making in humans, animals and computers in the 21st century and it applies to a wide range of behavioural relations.
The theory was initially developed to solve problems in Economics. The major pioneers were mathematician John Von Neumann and economist Oskar Morgenstern in the 1940s. Many people also considered mathematician John Nash (biography film “A Beautiful Mind”) to be the first to substantially expand Von Neumann’s and Morgenstern’s work.
Von Neumann’s work was followed by the 1944 book “Theory of Games and Economic Behaviour”, which he co-wrote with Oskar Morgenstern and dealt with cooperative games involving several players. Moreover, they claimed that the mathematics developed for the physical sciences up to that point, which described the workings of an uninterested nature, was a poor model for economics. They observed that economics is much like a game, where participants anticipate each other’s actions, necessitating development of a new branch of mathematics known as “Game Theory”. The second edition of this book included theory of anticipated utility, which allowed mathematical statisticians and economists to address decision-making under uncertainty.
Game Theory was applied to a wide range of situations where the players choice interacts to affect the result. The theory complements and goes beyond the classical theory of probability by emphasizing strategic factors of decision making, or features controlled by the participants rather than by pure chance. It was used, for example, to predict the likely formation of political coalitions; or business conglomerates’ likelihood of forming the optimal price at which to sell products; or services in the face of competition. Or even the power of a voter or a block of voters in an election; who should be chosen for a jury; the best location for a manufacturing plant; the behaviour of certain animals and plants in their struggle for survival, and many other applications. Furthermore, it even has applications in board games which many people play in their everyday life, like chess where both players know the possible moves of each other, and they must think strategically to win. What is more, Game Theory has an influence in stock market decisions, too. The investors make various decisions where they must consider and predict the players decisions, so they can act out to maximize their profit. In addition, Game Theory also has an important role in collective bargaining or negotiation between parties. In every possible negotiation, both parties should analyse and take in mind a lot of aspects, so they can end up in a solution which benefits the welfare of both.
Apart from the above, one interesting and unexpected application of Game Theory in general, occurs in biology. When two males face off, whether competing for a mate or for a contested territory, they can act either like “hawks”, fighting until one is injured, killed, or leaves the battle. On the other hand, they can act like “doves”, posturing a bit but leaving before any serious harm is done. Neither type of behaviour, as it turns out, is ideal for survival. Species containing only “hawks” would eventually have a high mortality rate. Species containing only “doves” would be vulnerable to an incursion by hawks or a mutation that produces hawks, because the population growth rate of the competitive hawks would be much higher than that of the doves due to their nature.
All things considered, Game Theory is a main factor in everyday life choices and forms a wise, strategic way to analyse decisions in every situation. In zero-sum games (e.g., Poker), every combination of strategies adds to a zero outcome (some win, and some lose, making the total outcome equal to zero). In non-zero-sum games, such as the “Prisoner’s Dilemma Theory”, there are in fact some potential decisions that can lead to outcomes which can benefit all sides. The theory was therefore being utilised long before it was discovered, and even now it is considered a timeless method used in instinctive behavioural responses.
Bibliography:
1) Game Theory Definition (investopedia.com)
2) An Overview of Game Theory in Sociology (thoughtco.com)
3) Game theory | Definition, Facts, & Examples | Britannica
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