Game Theory is a study of strategic decision making.
If you haven’t seen the Game Theory Basics, this article might help.
My analyses of the daily situations however, will not be explained in terms of complex mathematical formulas and arcane theories. I will work to digest all of this information and present it in a manner by which they can be useful to anybody, framed around the basis of common sense
For example my recent article Why Politician’s Can’t Agree on Anything
I use politics to show a casual application of Game Theory Principles on a commonly controversial topic that affects the public daily.
Albert Einstein once said “Pure mathematics is, in it’s way, the poetry of logical ideas” and it is this poetry that I’ll try to analyze and frame into the logical ideas that people can more easily digest and understand. This is how, it will be useful and this is how it will move to solve every day problems. Albert Einstein also stated that if you can’t explain it simply, you don’t understand it well enough. Herein lies my personal challenge.
Rooted in mathematics, with a wide variety of theoretical applications, game theory has often been criticized for it’s lack of practical applications. That is, providing insights to all sorts of issues without actually solving them.
Herein lies one of the primary goals of my study. An attempt to use game theory for daily practical use, by providing a fresh new set of rules and guidelines by which to view and analyse the world.
For the sake of brevity, I will quickly address two main fallacies that have been known to “Disprove” “Game Theory, and I will suggest proposed solutions to overcome these. The solutions I propose here will also serve as primary “Assumptions” that will bring a new dimension to my analysis.
The Rational Player Fallacy. The argument that game theory only applies when the players are perfectly rational in their decision making. While this certainly makes the mathematics of game theory more complex, I propose the use of another field of mathematics to solve this fallacy, Statistics. When a player encounters two choices, a perfectly rational player will select the best of the two. At which point it is easy to predict what a rational player’s move will be, by understanding what is objectively best for that player. This is considered their “Dominant Strategy” This leads way to analyze the next move. However, irrational players aren’t known to always choose what is best for them, providing a mathematical impasse for the analysis. This is where statistics come in, instead of analyzing “what is best for that player” the question that should be asked is “What do players usually do in this situation” Let’s say that in any particular scenario any given player will choose option “A” 80% of the time and option “B” 20% of the time, regardless of which choice is their dominant strategy. We could continue to analyze any given problem with an assigned degree of certainty. I do understand that as the moves continue with more and more choices and various degrees of percentages the “Certainty” will continue to exponentially decrease, making these theories useless within a few moves, however this leads me to the next point.
The Theory vs Practice fallacy. I must admit, this fallacy took me a while to overcome, for I know that there is a sea of difference between what things should be in theory vs what they actually are in practice. The solution came from two main sources in the field of evolutionary biology. “The Red Queen” by Matt Riddley and “Sapiens – a brief history of humankind” by Yuval Noah Harari. The Red Queen proposed that as soon as a particular species develops a competitive advantage, the landscape will adapt to this new competitive advantage, and soon thereafter a new competitive advantage must be developed in order to continue to succeed. Sapiens explains level 2 chaotic systems, unpredictable because as soon as it is predicted correctly it reacts and in turn changes (more on this later). These two key concepts, lead the way for the solution to this fallacy, by changing a basic assumption about games in general, the goal. If game theory is utilized for the purpose of “Winning” the game, the moment it provides with a tangible solution, that solution will no longer be valid, particularly in the scenarios of logical players, but in the scenario with irrational players, and shifting landscape, the logical goal of game theory should not be “Winning” but instead “Not-Losing”, to put it more eloquently, the goal of game theory should be not to win, but position itself for the upcoming move and eventually the upcoming new game.
Allan Turing (Cryptologist and Mathematician) during the second world war understood this. Hence when he developed a machine that could crack the Enigma Code, and in turn decipher all Nazi messages, he instead of using it immediately to “Predict” all Nazi movements, he instead chose to use a statistical approach to select which battles to win and which to lose, in order to win the war in the end. Had enough foresight to understand that IF the knowledge of his accomplishment had seen light of day immediately, Germany would have simply stopped using the enigma machine, change the landscape of war again and position itself again to win the war.
I’ll provide another quick example to prove my point. Blockbuster in the 90s was an industry leader in entertainment. They rose to the top of the industry outwitting and outmatching their competitors with their superior services. If game theory had a goal, blockbuster accomplished it perfectly, however by the time blockbuster had reached the top of the industry, the industry itself had already changed and evolved, and when blockbuster didn’t continue to evolve with it, it was overcome. As in business, evolutionary biology teaches us that the only constant in the world is change. That survival of the fittest is a myth, and that true survival is only guaranteed to those adaptable to change.
Hence, the goal of game theory shouldn’t focus on winning, but in setting itself up for the next game by continuously positioning itself in a dominant position.
From these two points, I will bridge the gap between theory and practicality as they relate to game theory to create actionable strategic insights.