What is Game Theory
A definition of what Game Theory is according to
Investopedia, "A model of optimality taking into consideration not only
benefits less costs, but also the interaction between participants."
Additionally also from that same segment on Investopedia, "Game theory
attempts to look at the relationships between participants in a particular
model and predict their optimal decisions." What this means is that
not only does it look at the outcoems of a certain "game" so to
speak, but it also looks at how the participants interact with one another.
It's a table and formula of how people may interact with one another and a
system of possible predicting what the outcome might be. The most famous
example used in conjuction of Game Theory is the Prisoner's Dilemma.
The
Prisoner's Dilemma works as follows: two people are accused of a crime and are
being interrogated separately and have no idea what the other is saying.
Obviously both parties want to minimize the amount of time spent in jail and
herein lies the dilemma. The sentences vary as follows:
1) If Person A pleads not guilty and Person B
confesses, Person B will receive the minimum sentence of one year, and Person A
will have to stay in jail for the maximum sentence of five years.
2) If nobody makes any implications they will
both receive a sentence of two years.
3) If both decide to plead guilty and implicate
their partner, they will both receive a sentence of three years.
4) If Person B pleads not guilty and Person A
confesses, Person A will receive the minimum sentence of one year, and Person B
will have to stay in jail for the maximum five years.
Pleading
guilty obviously is the most attractive offer, but only if the other party
pleads not guilty since the sentence is the least amount compared to the other
sentences possible. If both parties plead guilty, they will both end up serving
three years. Another outcome if they both plead not guilty they'll each serve
two years in jail whereas the risk of pleading not guilty is a five year
sentence should the other member decide to confess to the crime.
The
Prisoner's Dilemma is the most popular example as it can highlight the true
nature of people and can be applied to a multitude of scenarios and not just
one where two people might be facing jail time. Now according to
GameTheory.net, "Game theory is the study of how people interact and
make decisions. This broad definition applies to most of the social sciences,
but game theory applies mathematical models to this interaction under the
assumption that each person's behavior impacts the well-being of all other
participants in the game. These models are often quite simplified abstractions
of real-world interactions but offer a tractable way of predicting likely
outcomes" Basically what this means is that it is entirely possible to
use a formula to determine possible outcomes of a certain scenario. For a real
world scenario, look at what President Truman had to struggle with - whether or
not to drop the atomic bomb on the Japanese people to put an end to one of the
fronts of the war his country was fighting. If he didn't, then not only would
Japan continue to fight back, but countless American lives would have been
lost. If he did greenlight the operation, then thousands if not millions of
innocent human life would be annihilated as a result of his decision. So you
can see the struggle that President Truman had and the weight of the decision
he had to make, but the Game Theory can apply to that just as well as two
people facing jail time.
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