Jeff and Eran drew our attention to Ariel’s afterward to the new print of von-Nuemann and Morgenstern’s book, where he wonders about the usefullness of game theory to the “prediction of behavior in strategic situations” and to “improve performance in real-life strategic situations”. I must say that I disagree with Ariel and Eran: I believe that Game Theory does improve the world (when properly applied), and it can improve performance in real-life strategic situations.
Some interactions in life are complex, some are pretty trivial. Game theory is not advanced enough to handle complex situations, but it can manage simple situations. This is similar to analyzing, e.g., water flow in pipes. One can analyze the way water flows in a pipe, but the theory cannot handle flows in dented pipes. Physics has advanced enough to allow running simulations to analyze flows in dented pipes; Economics and Psycology have not done the same progress, so we will have to wait until we can run simulations on human behavior.
As I wrote in a previous post, game theory teaches us insights, like “think strategically”, or “the belief of the other player about the states of nature may differ from your belief”. These insights are the pearls of the theory, and they can help us when facing strategic interactions.
Story 1: I used to give popular talks on game theory. My father, who has 12 years of formal education and runs a printing press, attended one of them. In this talk I told the audience that one should think strategically in a strategic interaction, and put himself in the shoes of the other player. Few days later my father had to print a newspaper for a new client who he did not know. My father, as a careful manager, asked the client to pay for the whole work before the printing machine starts running. The client agreed. Few minutes before the job is scheduled to go into the printing machine my father got a phonecall from the printing press: the client paid only 80% of the amount, he said that he will pay the rest after the job is done. The first reaction of my father was to cancel the job: the cleint did not keep the payment arragement. Then he thought about his game theorist son, and about what his son told him: put yourself in the shoes of the other player. He did. And then he realized that if he were the client, he would be reluctant to pay all the sum up-front: this is the first time he works with this printing press, and he does not know whether they do a good job or a job on time. He decided to give Game Theory a chance, and told his workers to print the job. The end was happy, and the rest of the money was paid after the job was done.
Story 2: In the last several years of her life, my grandmother spent most of her time on the couch, watching TV, reading, solving crosswords. One day she asked me to buy for her few crosswords booklets. I did. Then she asked me how much it cost, because she wanted to pay for these booklets. I told her that it was nothing, a present from me to her. These booklets cost about $20, nothing as compared to the amount you spend on the kids, and anyway my income was higher than her income. She insisted. I thought what she would do if I do not tell her, and I realized that she would never ask again for these booklets or other things she needs, and then she will suffer from it. I told her it was $20 and everyone was happy.
One can dismiss these stories; after all, they involve very simple interactions. One may say that the reasoning is more psychological than game theoretic. Maybe, but I reached these insights knowing game theory and being ignorant of psychology. My conclusion from these and other similar stories is that game theoretic thinking does improve the world.
Eran
rvohra
Eilon
Jonathan Weinstein
Aviad Heifetz
8 comments
October 14, 2010 at 2:44 am
Eran
One thing we can surely agree on is that it is useful to think strategically and to put yourself in the shoes of the others. one thing we very definitely don’t agree on is that such insights are the pearls of game theory. In fact, if this was what game theory had to offer then i would find it banal, boring and insultingly pointless. And if these insights is what you are looking for then I am sure you can find plenty of them in all sort of self-help and self-improvement and `how to win friends and influence people’ books, whose authors haven’t read a single paper in game theory.
I understand that game theory was part of your reasoning in these stories, though I think most people wouldn’t need game theory to be able to do this kind of reasoning. But what completely amazes me is that you seem to imply that the fact that you are more aware of an advice like `put yourself in the shoes of the other’ is not just a side effect of your research in game theory, but that the advice itself is somehow the product of game theoretic research (or worse, its ultimate goal).
October 15, 2010 at 3:22 am
Eilon
Eran, you mix theory and practice. Mertens-Neyman proof that every zero-sum stochastic game has a value is a mathematical pearl. Definitely it should have gone into “Proofs from THE BOOK” by Aigner, Ziegler and Hofmann. But beautiful as it is, it does not concern laymen.
What laymen need are simple rules of thumb, principles and ideas that will help them be better people, more successful, better understand their neighbors and environment. And game theory gives them such insights. Is this the goal of game theory? No, its goal is to prove theorems like Mertens-Neyman. But these insights are by-product of the theory. And once we have them, why not share them with people who can use them for their benefit.
You are correct in saying that many of these insights can be derived using common sense. The point is that people do not use those insights. Do you think that President Obama (or his aides) put himself in the shoes of Israeli Prime Minister Benyamin Netanyahu before spending so much energy of the Israeli-Palestinian peace process? If he did, he would have already kicked Netanyahu ten times. The Winner’s Curse was a real problem until it was finally understood. I am not sure that even nowadays all bidders in all auctions realize it. Milgrom has many stories of auctions all around the globe that turned out really bad for the seller because they were badly designed. So the insights that Game Theory provide, though they may look trivial to experts like you and me, are far from trivial to the man in the street. For him, they are pearls.
October 15, 2010 at 1:27 pm
Eran
There are two ways to interpret your claim that game theory improves the world
A: Game theorists from von Neumann to Mertens and Neyman, by modeling and defining and proving and observing and experimenting, have managed to discover two profound truths: It is useful to think strategically in strategic situation, and to put yourself in the other person’s shoes. Now these truths are available to the world through the product of the intellectual enterprise which we call game theory
B: Game theorists, as a by-product of their research, have at their disposal some rhetorical tools — a couple of anecdotes, scientific jargon, mathematical facade, suit and tie — with which they can convey insights like `think strategically’ more successfully than other practitioners of the self-help and `how to get rich in five simple steps’ market.
By now I don’t know which one you are advocating. I disagree with the first. I have no clear opinion about the second (I do have financial interest in its validity though). The difference between the two interpretations is not in the level of triviality of insights like `think strategically’, but in whether game theory is responsible for producing these insights
Btw, your first paragraph starts by saying that I mix theory and practice and ends with what laymen needs. I didn’t understand your logic here. By `practicing game theory’ do you mean `explaining game theory for laymen ?’ I don’t think that’s what people usually mean when they talk about practice in science.
October 16, 2010 at 12:14 am
Eilon
What is practice? To different people that would be a different thing. President Obama may want to apply game theory to various political situations: when to make various statements, when to pressure this person or that person, how much to invest in this project or that project. Ben Bernanke may want to see its application to problems in macroeconomics: the effects of increasing the interest rate, or of increasing a certain tax. I guess that game theory does provide a limited help here; we do have models that provide insights, but reality is more often than not too complex, our models neglect aspects of the situation that may turn out to be important, and therefore our predictions and insights may be partial and leave out important consequences of our actions.
But President Obama and Ben Bernanke are not the only people in the world. In fact, most people do not care about what game theory has to say about the issues that trouble these two guys. For most people, applying game theory would be things which are trivial to us but new to them: idenfity the participants in the situation you face, identify their goals, what is the information available to you, what is the information available to the other players, should you reveal your information or conceal it, the winner’s curse, the use of punishment, utility is not monetary income. Indeed, as you said, these are the sorts of insights that you expect to find in self-improvement books. But is it such a bad thing? The more consulting you will do, the more you will realize that these simple observations are what people need.
Did game theorists invented these insights? Not at all. Son Tzu, the author of “The Art of War” reached similar insights about 2500 years ago. Niccolo Machiavelli did it 500 years ago. I am sure that others did it as well. So you do not need game theory to reach these insights, but certainly game theory helps. We are trained to think strategically, and therefore these points look banal to us. When a situation is presented to us, we can ask questions about the implications of one’s actions that people who are not familiar with game theory might not ask. This is, by the way, the reason that you will be hired as a consultant.
I hope that now you can better interpret my view. Game theory can improve the world, because it can help the man in the street function better. It may also help the big guys like Obama and Bernanke make better decisions, but this statement will be more cinvincing if written by a serious theoretical economist and not by me. So my intepretation to my view is much more than A and B, in a less ridiculous light than you present it. I hope.
October 31, 2010 at 8:23 am
Fernando Barrichelo
Eilon and Eran,
I enjoy so much your discussions. Be sure you are improving the world just by posting and presenting your arguments. I mentioned them in my game theory website (in portuguese).
Let me give my opinion here. I am laymen person in this context (i am not mathematician and economist, I am engeneer with MBA). So, I am another person since I learned game theory. I like the math behind it, but what I love is that game theory help structure the reasoning.
Knowing some intelectual anecdotes and formal models, thinking about incentives in terms of payoff matrix, putting in the shoes of competitors before I decide, understanding the difference between one-shot game and interative situations, and all stuffs, are very useful. I did not think this way before learning game theory.
Ok, it is true, I could learn all this think in other classes, in the same way I learned other useful concepts like sunk cost, marginal cost, present value, etc. They also change my way of thinking.
One could say that those insights are not from game theory. However, game theory did that for me, fact. I am sure that game theory can do the same for others. Afterall, all those concepts are already bundled in game theory. So, why not use them to teach strategically thinking? It is not the one way, but it is a powerfull way to complement strategy and economics classes.
November 2, 2010 at 10:14 am
sikislist
my God, porfect.
April 6, 2011 at 6:00 am
Matt Nicholson
For me the most important things to be gained from games theory are to be found in the insights of Robert Axelrod, in that they demonstrate how ethical behaviour can evolve for purely selfish reasons, and does not require an outside agency to persuade us to ‘play nice’. There is also his concept of ‘the shadow of the future’ which gives us a blue-print for resolving divisions in our societies. Faith schools are not a good idea, for example. Far better to encourage the intermingling of children from different backgrounds so as to nurture understanding and trust. Anything that extends the ‘shadow of future interactions’ between disparate groups is a good thing.
April 7, 2011 at 7:52 am
ivan
Interesting debate. Here are my own priors. I think that no theory is driven by the need to improve the world or any other utilitarian consideration but purely by intellectual curiosity (“all men by nature desire to know”). Nor, the value of a theory is measured by its consequences or effectiveness (unlike plumbing). Of course, some theories may have practical side effects, even the most abstract ones.
In any case, one just need to see a car dealer to realize that the best bargainers have never read game theory and don’t need it. The reason for this observation was given by Aristotles: ‘Anything that we have to learn to do we learn by the actual doing of it… We become just by doing just acts, temperate by doing temperate ones, brave by doing brave ones.’ (Aristotle Niconachean Ethics, Book II, p.91)