Game Theory in Economics
Game Theory in Economics
Game theory is a concept of decision making that considers more elements beyond just benefits minus costs. Specifically, it includes the interaction between participants. In economics, the theory attempts to predict the participants’ optimal decisions. It has found a core place in economic decision-making and policy-making for its inherent ability to predict reactions in resource allocation, business negotiation, and other economic aspects. Game theory is mostly associated with decision-theory and other contexts such as cooperation and negotiations.
From its definition, it is evident that the game theory is largely used in the study of the human decision making processes. In psychology, its equivalent is known as the theory of social situations. In economics, however, game theory tends to focus on sets of outcomes known as equilibrium that represent the most rational solutions to each situation. Game theory emanates from the complexity of human interactions; thus, in a situation where an individual is dealing with an inanimate object such as a tree, he or she does not expect the tree to fight back or respond (Leyton-Brown and Shoham 51). The environment can also be considered neutral to what is done to the tree, at least in direct and rational response. In human interactions, however, each action by an actor emanates from a situation and elicits a response. Each actor must thus recognize how his of her interaction with other rational actors works so as to foster cooperation and stem conflict. Every game is primarily dependent on a core strategic interdependence. Strategic interdependence is defined by two major types, namely simultaneous and sequential ones. In simultaneous strategy, the players act at the same time or at different times but without perfect knowledge-essentially what the other players are doing. In the latter strategy, however, the players move in sequence, with knowledge of all the past actions by the other players.
Game theory is a concept of decision making that considers more elements beyond just benefits minus costs. Specifically, it includes the interaction between participants. In economics, the theory attempts to predict the participants’ optimal decisions. It has found a core place in economic decision-making and policy-making for its inherent ability to predict reactions in resource allocation, business negotiation, and other economic aspects. Game theory is mostly associated with decision-theory and other contexts such as cooperation and negotiations.
From its definition, it is evident that the game theory is largely used in the study of the human decision making processes. In psychology, its equivalent is known as the theory of social situations. In economics, however, game theory tends to focus on sets of outcomes known as equilibrium that represent the most rational solutions to each situation. Game theory emanates from the complexity of human interactions; thus, in a situation where an individual is dealing with an inanimate object such as a tree, he or she does not expect the tree to fight back or respond (Leyton-Brown and Shoham 51). The environment can also be considered neutral to what is done to the tree, at least in direct and rational response. In human interactions, however, each action by an actor emanates from a situation and elicits a response. Each actor must thus recognize how his of her interaction with other rational actors works so as to foster cooperation and stem conflict. Every game is primarily dependent on a core strategic interdependence. Strategic interdependence is defined by two major types, namely simultaneous and sequential ones. In simultaneous strategy, the players act at the same time or at different times but without perfect knowledge-essentially what the other players are doing. In the latter strategy, however, the players move in sequence, with knowledge of all the past actions by the other players.
Cited: Gintis, Herbert. Game Theory Evolving: A Problem-Centered Introduction to Modeling Strategic Behavior. Princeton: Princeton University Press, 2000. Print. Harrington, Joseph E. Games, Strategies, and Decision Making. Birmingham: Worth, 2008. Print. Leonard, Robert. Von Neumann, Morgenstern, and the Creation of Game Theory. New York: Cambridge University Press, 2010. Print. Leyton-Brown, Kevin, and Yoav Shoham. Essentials of Game Theory: A Concise, Multidisciplinary Introduction. San Rafael: Morgan & Claypool Publishers, 2008. Print. Osborne, Martin. An Introduction to Game Theory. New York: Oxford University Press, 2003. Print. Papayoanou, Paul. Game Theory for Business. New York City: Probabilistic Publishing, 2010. Print.