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.