Game Theory

Since you chose Game Theory I guess I'll give a little summary of what it is. To be honest, I barely understand the specifics of Game Theory, so I can't give you much more than a glossing over of what it is and perhaps an example of a "game". Game Theory is a mathematical science, and considering my trouble with advanced math, I can't go into the analytical details either.

Game Theory is a mathematical science generally used in economics to predict outcomes that depend upon human behavior. More specifically, game theory looks at different games, or situations in which a person must make a decision that affects both themselves and another person or persons. Using certain guidelines and assumptions, various theorems in game theory can predict what is the most likely outcome, mathematically. This systematic analysis of behavior and decision making is very useful for creating economic models, although it is certainly a hit-and-miss science when applied to the real world. The new field of behavioral economics (as opposed to classic, keynasian, etc which we looked at with Mr. Hunt) uses a lot of Game Theory.

Instead of fumbling around trying to explain more of Game Theory in general terms, I thought I'd just give the most classic example of a "game" or situation: The Prisoner's Dilemma.

'Tanya and Cinque have been arrested for robbing the Hibernia Savings Bank and placed in separate isolation cells. Both care much more about their personal freedom than about the welfare of their accomplice. A clever prosecutor makes the following offer to each. “You may choose to confess or remain silent. If you confess and your accomplice remains silent I will drop all charges against you and use your testimony to ensure that your accomplice does serious time. Likewise, if your accomplice confesses while you remain silent, they will go free while you do the time. If you both confess I get two convictions, but I'll see to it that you both get early parole. If you both remain silent, I'll have to settle for token sentences on firearms possession charges. If you wish to confess, you must leave a note with the jailer before my return tomorrow morning.”'

In non-mathematical terms, the question is what will each prisoner decide and why. As a quick side note, this is a "zero-sum game" which means that a subject can only do better at the expense of someone else. This simple incarnation of Game Theory is all that I know about right now. Anyway, many "games" involve whether cooperation between the two individuals will result in better situations for both, and then if the two will cooperate in the end. Using the simple Prisoners' Dilemma, we can easily deduce that the best results for both prisoners would be yielded by neither betraying the other. But the inherent quality of the prisoners is that they are solely interested in securing their own freedom. As a result, according to Game Theory, both prisoners will confess by applying rational decision-making, resulting in greater sentences than if they had cooperated. Why exact that is is far better explained by wikipedia:

"In this game, as in all game theory, the only concern of each individual player (prisoner) is maximizing his or her own payoff, without any concern for the other player's payoff. The unique equilibrium for this game is a Pareto-suboptimal solution, that is, rational choice leads the two players to both play defect, even though each player's individual reward would be greater if they both played cooperatively.
In the classic form of this game, cooperating is strictly dominated by defecting, so that the only possible equilibrium for the game is for all players to defect. No matter what the other player does, one player will always gain a greater payoff by playing defect. Since in any situation playing defect is more beneficial than cooperating, all rational players will play defect, all things being equal."

An "equilibrium" I believe is simply an expected, repeated result for the game. Additionally, a "Pareto-suboptimal solution" means that it is a situation wherein one can only experience betterment (usually meaning in economic wealth terms) through the worsening of another. I have to stop here because my dad needs to use the computer. There was one more thing I was going to talk about, so I guess I'll have to post it separately later. I hope this made some sense.