Introduction
Game theory can be described as the study of cooperation and conflict. Its concepts are applicable in situations where the actions of a large number of actors are inter-dependent. Such actors can be individual people, groups of people, institutions, or a mix of different entities. The theory enables the formulation of a language, creation of its structure, its analysis, and an understanding of the varied strategic situations that may occur during the process.
In effect, game theory can be said to be a basis for making rational decisions whereby the given decisions create impacts on the decision making the ability of other entities in the group, while also impacting one’s own decisions at the given time (Turocy and von Stengel 1).
In sociology, the game theory is referred to as the theory of social situations. Many use the game theory while playing parlor games such as bridge and poker, but it is used in research primarily to determine the behavioral and communication patterns of people in groups.
Main Body
According to Levine, game theory can be divided into two parts; cooperative and non-cooperative. Non-cooperative game theory is more concerned about how people interact and how such interactions impact the outcomes achieved by people (1). Also, there are some economic theories that are closely associated with game theory, and many economists view these theories to be a part of game theory:
- Decision Theory
- General Equilibrium Theory
- Mechanism Design Theory
The decision theory can be considered a theory that involves games played between individual players or games played between an individual and nature. The emphasis is placed on how belief systems are formed and how preferences are made in holding that the preferences relative to risky choices are best described by using processes that describe how expected values of a given numerical function of utility can be maximized.
In this context, the derived utility depends on different factors, although economists are most concerned about financial matters. The general equilibrium theory is mostly used as a focused branch of game theory in dealing with aspects such as production and trading activities in situations where a large number of people or entities are involved.
The theory is mostly used in making macro-economic analysis about broader aspects of economic policies about taxes and finance. It is used to analyze stock markets, to examine the trends in interest rates, exchange rates, and price movements.
Recent years have seen increasing use of the game theory in combination with the equilibrium theory, mostly by private sector entities in attempts to examine the extent to which processes can be modeled by using positive elements of the theory. Also, the equilibrium theory is also used in combination with the game theory to ascertain voting behaviors and the effectiveness of government incentive schemes.
The mechanism design theory is a little different from game theory because it does not assume that the rules of the game are already provided for. Instead, it seeks to determine the impacts of the different rules that prevail at any given time.
However, all these aspects are heavily dependent on game theory because there is a strong need for analysts to use the theory for designing wage and compensations schemes that are effective in broadening the risk base while ensuring that incentives are not impacted adversely. At the same time, it becomes possible to create better strategies for conducting auctions to enhance revenue and to achieve other organizational objectives.
In the modern world, game theory is better understood as the scientific study of realistic and interactive decision making. The theory has now proved to be very helpful in creating a better understanding of the processes through which people make decisions and about knowing why they take the given decisions.
The theory is very crucial in our daily lives because it enables amazing insights about the different kinds of efforts that human beings make in virtually every field of human activity. It is known that the game theory has become an indispensable instrument for economists because it has strengthened the theories put forth by several Nobel laureates in the field of economics.
Game theory is very helpful for corporations because it allows them to take concrete decisions after duly examining the alternatives relative to the intricate negotiations involving billions of dollars and thousands of jobs. The theory is widely used in making international diplomacy strategies as well as military strategies, and it thus impacts the future and destiny of millions of people that are influenced by the decisions taken by leaders of different nations.
Game theory helps a great deal in providing understanding about the origin of human behavior. It not only helps psychologists in understanding why people behave in particular ways but also provides insights to biologists about the evolutionary patterns of human beings and how the given behavioral patterns of human societies have changed across different ages (Stevens 2).
Game theory can also be seen working effectively in the interactions that people engage in daily. Human activities such as buying a car, making money in stock markets, making real estate negotiations, and making salary negotiations all involve a strong element of game theory. However, a basic knowledge of the theory is essential for any person wishing to benefit from it.
Exhaustive knowledge of this extremely important concept allows us to overcome the problems associated with dealing with a lot of confusing information. Better decisions can be made in one’s own life while also understanding the situations faced by other people involved in the game. All games can be understood as interactions in which two or more players are involved.
There are situations in which people are known to share common details about the structure of the game in question and tend to make rational choices relative to the strategy that works best in enabling the achievement of maximum benefits. However, there are more complex games, such as those involving paths that relate to dealing with nuclear issues amongst nations and entering into multi-billion dollar negotiations amongst major corporations.
Nevertheless, whatever the extent of the game may be, one does confront fascinating challenges. At the same time, one does not realize that decisions are being made spontaneously, while most players may not be in the know about what others are involved in.
People involved in such games are confronted with a set of appealing and enthralling questions that stretch their imagination in thinking about several possibilities, and they are eventually able to make decisions based on the insights they gain in the process. There are situations when players are in a dilemma about determining if decisions are being taken concurrently, and if all the players are aware of what processes others are involved in.
Another issue that may arise is the question of whether the knowledge is made available in stages by way of following the decision taken by the other player. One also wonders if it is possible to enter into obligatory agreements with one another and whether the element of probability is involved in the ensuing actions.
There is no limit to the extent to which a player can extend his/her imagination. However, players are gradually able to develop the ability to answer the questions that come to their minds, and the game develops further, resulting in benefits to all parties because of the effective use of the emerging analytical tools.
According to Levine, the power of game theory can be understood from the premise that “If we were all better people the world would be a better place” (1). This represents a fallacy of composition because although the statement is applicable for every individual, it may not necessarily be applicable for a group as a whole.
Game theory provides a detailed connotation of both sides of the statement, which allows for the refutation of a given statement under particular circumstances. This aspect is best demonstrated through the prisoner’s dilemma, which is a true reflection of the game theory. The author has given a variation of the game in the form of the Pride Game, which is represented in the following diagram:
Diagram 1.
Source: Levine, David K. What is Game Theory 2014.
The pride game is almost the same as the Prisoner’s Dilemma except that a new strategy of being proud is added. It is apparent that a proud person is one who will not usually confess except while retaliating against a partner who has confessed. Meaning that if one is proud and confesses, the score in the above diagram is 1.2 because both have confessed.
This also means that the second person who confesses can stand proud before the first person’s humiliation but is given 0 in the diagram because he stands humiliated before the first person’s pride. On the flip side, if both individuals are proud, they will not confess, and their pride will carry a cost factor because both try to humiliate each-other, which is why both get four each instead of 5.
A typical example of how game theory can be used successfully is apparent from how a sports team gets involved in cooperation to work as a group and to achieve the desired team outcome. For instance, a football team playing in the World Cup has the main objective of cooperating to win the game. Every player in the team is assigned a role and is responsible for contributing towards achieving the team objective.
It is also apparent that there are some players in the team that will assume the role of lead players because of their exemplary ability and performance and they are the ones who will lead the team to victory. Other players do have an equal role, but they eventually turn out to assume supporting roles. But because they assist the lead players, the team can achieve success as a whole.
However, a different position emerges when people think from the perspective of game theory because they then tend to renege and try to break the rules in deviating from their assigned roles as and when the opportunity is available.
In such situations, the issue arises as to how the team can continue to sustain its cooperation despite the urge amongst some players to break the given rules to achieve a sense of glory. It is surprising that the solution to this dilemma also comes from game theory.
It is noteworthy that the game theory can be effectively used in our daily lives (in activities such as salary negotiation) to achieve better outcomes by using a rational approach directed at providing logical reasoning to other players. Given that there are several people in the organization that receive salaries, the game tends to become complicated because of the negotiations involved in the process.
Larger numbers of people imply greater difficulties in arriving at mutually acceptable outcomes. It is thus beneficial to break down negotiations to a single partner.
In order to achieve higher salary through negotiation and the use of game theory, it is always better to reduce one’s risk, which is best done by making the initial offer, being aware of past patterns, having credibility, maintaining consistency and demonstrating a mutual association with the player with whom the compromise or conciliation is to be made.
However, it is important to ensure that one’s services are required, which ensures his/her eligibility to get the raise. Once an individual opts to have a salary hike and enters into negotiations, it is possible to work downwards in discussing the different objections raised by the supervisor and to provide a counter-explanation for each of them. One achieves success if the partner is known, and the path to the result is understood.
Another use of game theory in our daily lives is that it allows us to save money by purchasing a car at a lesser price. Instead of just visiting a car dealer and negotiating with the salesman, a better option is to research the available dealers and call each one of them and negotiate with them individually.
Negotiations over the phone work well because of the convenience associated with it in comparison with the option of visiting each dealer. Given the competition amongst dealers, one of them will eventually agree to a negotiated price that will be much lower than the going rate. There are several examples of people that have benefited by negotiating in this manner. Another way of benefiting from game theory in our day-to-day lives is to use risk arbitrage to exploit prevailing market conditions and to make profits.
Also known as merger arbitrage, the practice permits investors to simultaneously buy stocks of a company that has declared it will be taken over by another company. An interesting aspect of game theory is that it is often at work without people being aware of it, particularly in negotiations relative to real estate.
It is known that the need to enter into negotiations in the majority of the real estate deals is known in advance, which allows the game to be clearer in comparison to other situations.
But when there are multiple offers on the deal, the situation is different. For example, if one has already made a bid and the mediator then declares that there are multiple offers on the deal, the situation becomes different, and one has to decide amongst the available choices. The original bid can be retained or withdrawn, or a higher price can be offered.
Given that the winning bid will have to be higher than the other contenders, it is better to offer a higher price to clinch the deal. Under such circumstances, one must bid based on the calculations made regarding the different parameters.
However, if somebody makes a higher bid, one should not feel disappointed because he/she had made the bid after making all pertinent calculations in keeping with the prevailing situations. There is no need to feel disappointed because no incorrect decisions were taken in the entire process.
Fantasy sports can be effectively played by using game theory with the use of replacement level draft strategies that require placing a specific value on every player. Online projection systems can be used to place a value that is expected to be the least significant for a given position. With a well-thought strategy, every player of the higher value can be replaced with the one having lower value perceptions.
The strategy allows one to achieve the optimum team outcomes based on projections. There are good chances that each player will not use such replacement strategy, which allows for altering one’s rankings by including the next player in line by using standards of evaluated abilities.
Just as it is done in the context of real state, players of poker can adopt optimum strategies, which may not always give the winning edge but will give the consolation that the attempt was worthwhile. In poker, the odds have to be studied, and the odds have to be also played.
Even if one loses trust in playing correctly, it is better than constantly changing one’s style in the game. Adopting the optimum strategy helps in achieving the best possible outcomes repeatedly, even though the optimum strategy may sometimes lead to lost points (Duronio 1).
Conclusion
The best way to understand game theory, particularly in the context of how we can use it in our daily lives is to think from the perspective of why better people can tend making the world a bad place. It can be said in this regard that if people transform in becoming more considerate for one another and nothing changes, the world will not become worse. But if people become more considerate for one another, it is true that they will tend to alter how they behave.
It is apparent from this example that when people attempt to adopt such strategies concurrently, the eventual outcome may make all people worse off. It is known in this regard that criminal behavior creates complexities because altruistic law-breakers will then tend involving in lesser crimes.
But given that crimes would then not carry severe punishments, criminals would be motivated to involve in more crimes. Therefore, if the net result is that the numbers of crimes increase, the world would become a worse place.
It is in this context that theorists have felt that game theory can be said to be a basis for making rational decisions whereby the given decisions create impacts on the decision making the ability of other entities in the group, while also impacting one’s own decisions at the given time.
Works Cited
Duronio, Ben 2012, 7 Easy Ways To Use Game Theory To Make Your Life Better.
Levine, David K. 2014, What is Game Theory. Web.
Stevens, Scott P. 2014, Games People Play: Game Theory in Life, Business, and Beyond. Web.
Turocy, Theodore L. and Bernhard von Stengel 2001,Game Theory. PDF File.