Game Theory Insights

Before delving into this topic, I had limited knowledge about game theory. Through my research, I discovered why many view societal or business management as a strategic game. As described by Investopedia:

"Game theory examines how individuals and entities (known as players) make decisions in various situations. It serves as a theoretical framework for understanding social interactions among competing players."

In essence, game theory explores optimal decision-making among independent actors in a strategic context. Its applications are vast, spanning multiple fields to analyze diverse situations and predict outcomes.

The origins of game theory trace back to 1944 when mathematician John von Neumann and economist Oskar Morgenstern published A Theory of Games and Economic Behavior, positing that economic situations can be viewed as games between multiple players. The core components of game theory include players and strategies. Players are seen as rational decision-makers, and strategies represent the actions they undertake based on situational variables. Typically, strategies are rooted in self-interest and expectations of others' actions.

Elements of Game Theory

Game theory encompasses various types, including simultaneous vs. sequential and cooperative vs. non-cooperative games. Regardless of the format, certain criteria must be met for a situation to be classified as a game. All players must be aware of the rules, their potential strategies, and the rewards for winning. A game concludes when a player reaches equilibrium through their decision-making process. A fundamental assumption is that players will act rationally, making choices that align with their self-interest.

One of the most recognized examples of game theory is the "Prisoner's Dilemma." In this scenario, two suspects are arrested for a crime without sufficient evidence for a conviction. They are interrogated separately, with four possible outcomes based on their decisions to confess or remain silent. The optimal outcome occurs if neither confesses, resulting in a two-year sentence for each. However, without communication, both suspects are likely to act in their self-interest, leading to a less favorable joint outcome.

The versatility of game theory extends beyond dilemma games; it can be applied to various real-life situations such as poker and strategic military planning.

Economic Theories Explained

Economics, a subject I initially found nebulous, essentially studies how individuals respond to varying circumstances and the changes that affect them. The American Economic Association defines economics in several ways, summarizing it as:

"[Economics is] the study of scarcity, resource usage, and decision-making. It encompasses topics like wealth and finance, but its scope is broader, aiding in understanding historical trends and forecasting future developments."

Economics can be divided into microeconomics, which focuses on individual choices, and macroeconomics, which examines larger-scale economic issues. Traditional economic game theories often operate under the assumption that individuals make rational decisions based on past experiences, striving for optimal outcomes.

However, this perspective assumes a foundational rationality in humans, suggesting that we typically prioritize known information over emotional responses. Contrarily, research, particularly in marketing, indicates that emotional reactions often dominate our decision-making processes.

Recent Research Developments

Physicist Jérôme Garnier-Brun from École Polytechnique found the prevailing economic assumptions about human behavior at odds with observable phenomena in nature. Most natural interactions tend to result in chaos rather than stability. Consequently, Garnier-Brun and his team designed a mathematical game with numerous theoretical players to assess whether past learning genuinely aids in avoiding chaotic outcomes.

Each player had the option to choose between actions, such as buying or selling stocks, influenced by their previous experiences. The researchers manipulated variables to gauge the impact of past experiences on decision-making and player cooperation.

If economists were correct, the majority of scenarios would lead to stable outcomes. However, their findings revealed only one scenario in which all players performed "optimally," under the influence of a hypothetical central authority. In most other cases, players reached only satisfactory outcomes, indicating that while past experiences had some impact, they fell short of optimal performance.

The study concluded that while long-term memories of beneficial experiences could foster stability, reacting impulsively to recent events often resulted in chaos. Notably, increased competition destabilized equilibrium points, suggesting that a certain degree of randomness could enhance collective decision-making.

Researcher Jean-Philippe Bouchaud emphasized the need for a paradigm shift in economic thinking, challenging the notion that individuals consistently make complex economic calculations.

A Shift in Perspective

In exploring various fields of research, we often distance ourselves from the subjects we study, forgetting our inherent connections. While we consider ourselves rational decision-makers, this research serves as a reminder of our emotional and often impulsive nature. Recognizing this duality can open doors to a future where we embrace all aspects of our identity, using both logic and emotion to inform our choices.

This article was initially featured in the author's newsletter, Curious Adventure, before being edited and republished on Medium with permission.