For a while now I’ve wanted to have a special segment on this blog that picks out a key jargon-y word or phrase in economics from time to time and help to unpack it, and advance the knowledge on it among non-economists. So, welcome to ‘Speakonomics with The Curionomist’!. You’ll see me posting these from time to time. The first one is on Game Theory. A concept I first learnt in my first year of an economics undergraduate, in a microeconomics module. I later went on to learn a little more about it in the context of decision making around wage setting at the firm level, in Labour Economics. So why did I think of Game Theory this week? This week was a tough week for Greece, as it attempted to play a game with Eurozone authorities and try to postpone its debt commitments in exchange for very weak conditionalities on austerity and other reforms. And interestingly, the new rockstar Greek Finance Minister is a student of Game Theory and has written books on it! While of course he claims that he won’t use such stratagem in his discussions with European authorities and creditors, I’m sure his awareness of game theory-based decision making does come in handy when warding off demands of belt-tightening from one group and demands of cancelling austerity on the other.
So, what is Game Theory? A lot of definitions exist, but they all point to the same idea. Its the mathematical study of decision-making, of conflict and strategy in social situations. It’s also been described as an “analysis of strategies for dealing with competitive situations where the outcome of a participant’s choice of action depends critically on the actions of other participants.”
The movie – ‘A Beautiful Mind’ – about the Nobel Prize-winning John Nash, portrayed by Russel Crowe, brought it all into popular culture, it is a scholar called John Williams who first tried to bring it to the masses.
The BBC has a great article this week that reviews Game Theory – especially the popular explanation of it via the ‘Prisoner’s Dilemma’ example. It also quotes an economics professor who taught me at UCL, Antonio Cabrales.
For an economist Game Theory is a core concept. Economics is about economic agents making decisions about allocating resources, it’s about behaviours and their outcomes, preferences and utilities of those agents), and how their interaction influences the outcomes. So, Game Theory – which is an analysis of this decision making process – necessarily becomes a core idea in economics.
Game Theory is present in our everyday lives in some form or other. Like that time when you eyed the last parking spot and saw another car eyeing it up too; that time you found a car for sale through a HitAd advert and went over to the seller to get the best price for it; that time when you negotiated with your boss over a salary raise, at the risk of getting fired; that time your company was bidding for a road construction project; or even whenever you play the simple game of ‘Rock – Paper – Scissors’. BusinessInsider has a few suggestions where Game Theory in its simplest forms can come in handy in everyday life – http://www.businessinsider.com/how-to-use-game-theory-to-your-benefit-2012-4?op=1
Can you recall a time when game theory came into play in your life recently?