The study of strategic interactions is gaining popularity across disciplines, but that does not mean its relevance is universal.HT: naked capitalism
Although game theory is now a household name, few people realize that game theorists do not actually study “games” — at least not in the usual sense of the word. Rather, we interpret a “game” as a strategic interaction between two or more rational “players.” These players can be people, animals, or computer programs; the interaction can be cooperative, competitive, or somewhere in between. Game theory is a mathematical theory and, as such, provides a slew of rigorous models of interaction and theorems to specify which outcomes are predicted by any given model.
Sounds useful, doesn’t it? After all, many people are familiar with one of game theory’s most famous test cases: the Cold War. It is well-known that game theory informed U.S. nuclear strategy, and indeed, the interaction between the two opposing sides — NATO and the Warsaw Pact — can be modeled as the following game, which is a variation of the famous “Prisoner’s Dilemma.” Both sides can choose to either build a nuclear arsenal or avoid building one. From each side’s point of view, not building an arsenal as the other side builds one is the worst possible outcome, because it leads to strategic inferiority and, potentially, destruction. By the same token, from each side’s point of view, building an arsenal while the other side avoids building one is the best possible outcome.
However, if both sides avoid building an arsenal, or both sides build one, neither side has an advantage over the other. Both sides prefer the former option because it frees them from the enormous costs of a nuclear arms race. Strangely enough, though, the only rational strategy is to build an arsenal, whether the other side builds one (in which case you are saving yourself from possible annihilation) or does not (in which case you are gaining the strategic upper hand). This analysis gave rise to the doctrine of MAD: Mutually Assured Destruction. The simple idea is that the use of nuclear weapons by one side would result in full-scale nuclear war and the complete annihilation of both sides. Given that nuclear stockpiling is unavoidable, MAD at least guaranteed that no side could afford to attack the other.
So it would seem that game theory has saved the world from thermonuclear war. But does one really need to be a game theorist to come up with these insights? Game theory tells us, for example, that different forms of stable outcomes exist in a wide variety of “games” and computational game theory gives us tools to compute them. But the type of strategic reasoning underlying Cold War policy does not directly leverage deep mathematics — it is just common sense.
More generally, one can argue that game theory — as a mathematical theory — cannot provide concrete advice in real-life situations. In fact, one of the most forceful advocates of this point is the well-known game theorist Ariel Rubinstein, who claims that “applications” of game theory are nothing more than attaching labels to real-life situations. In an article that rehashes his well-known views, Rubinstein cites the euro zone crisis, which some say is a version of the Prisoner’s Dilemma, to argue that “such statements include nothing more profound than saying that the euro crisis is like a Greek tragedy.” In Rubinstein’s view, game theory is first and foremost a mathematical theory with a “nearly magical connection between the symbols and the words.” By contrast, he contends, for the purpose of application, we should see game theory as a “collection of fables and proverbs” that can provide an interesting perspective on real-life situations but not give specific recommendations.
Michael Chwe, a professor of political science at the University of California, Los Angeles, offers a different take, arguing in his latest book that novelist Jane Austen is, in fact, a game theorist. After describing a scene from Mansfield Park, Chwe writes: “With this episode, Austen illustrates how in some situations, not having a choice can be better. This is an unintuitive result well known in game theory.” Another of Austen’s game-theoretic insights has explicit applications: “When a high-status person interacts with a low-status person, the high-status person has difficulty understanding the low-status person as strategic. … This can help us understand why, for example, after the U.S. invaded Iraq, the resulting Iraqi insurgency came as a complete surprise to U.S. leaders.” ...MORE
See also April's "Jane Austen: Game Theorist" and more generally:
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"Game Theory and Crowded Trades"
