Game Language

by Russ Roberts on October 12, 2005

in Education

Tyler responds to the claim that game theory is a dead end because it doesn’t generate testable implications by giving five possible reasons why game theory is still worth pursuing and understanding:

1. Behavioral approaches will flesh out how humans
actually behave.  Game theory will end up with clear predictions, just
give it time.

2. Computational approaches will flesh out how humans
actually behave.  Game theory will end up with clear predictions, just
give it time.

3. Evolutionary approaches will flesh out how humans
actually behave.  Game theory will end up with clear predictions, just
give it time.

4. Experimental approaches will flesh out how humans
actually behave.  Game theory will end up with clear predictions, just
give it time.

5. The real world is in fact indeterminate or close to
indeterminate.  The indeterminacy and multiple equilibria of game
theory are not a problem, but rather reflect how closely the theory
mirrors reality.  Yes you might prefer sharp, clear predictions, but
tough tiddlywinks, you’re not going to get them.  Faithfulness to
reality is more important than fulfilling abstract methodological
strictures.

Here’s one I’d suggest:

6.  Game theory generates no predictions about the real world but it is a useful way of organizing your thinking about various real-world phenomena.  It’s a language that helps avoid mistakes or confusion.

That having been said, I think the kind of phenomena that game theory helps with are more limited than most of the profession seems to think.  Competition reduces the role and importance of strategic behavior and makes game theory less useful.

Tyler’s closing argument implicitly make the point about organizing your thinking:

The bottom line: Like so much of economics, the strongest argument for game theory is simply to chat with someone who doesn’t know any.

The problem is that game theory can organize your thinking the wrong way because it tends to cause its users to underestimate the power of competition.  I assume this is a result of taking payoffs as given when in fact they are often endogenous and affected by market forces. 

I once was confronted by a graduate student (at a university where I taught in the past)  who angrily complained that I was poisoning my students by naively telling them that price controls on gasoline cause lines to form. When I asked him why he thought otherwise, he patiently explained to me that Professor X (a noted game theorist) had taught the graduate students that "anything can happen."  (He said it proudly, as if it were the highest virtue of a theory.)

That’s true, I replied, anything can happen.  It’s possible that at the exact same time price controls are imposed, demand could collapse for other reasons or supply could shift out wildly due to some new technology.  But I think those changes are unlikely.  Or maybe some side component of the legislation would rule out lines.  But in the absence of those changes, lines would form.  I was willing to bet large sums of money that binding price controls like those we had in the past with gasoline would again result in drivers waiting in line.

The market/competition approach to price controls is, of course, wildly "unrealistic."  But I would argue it does a better job of helping you organize your thinking in a lot of situations where people often use game theory.

Comments

Add a Comment    Share Share    Print    Email

Previous post:

Next post: