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The use of game theory in modelling software

This article discusses the rise of software used to harness game theory to analytically predict the outcomes of political and economic situations. It firstly discusses software invented by a man named Bruce Bueno de Mesquita, an academic at New York University, and how he’s applied it to political situations ranging from the recent Egyptian upheaval to the successor of Iran’s Ayatollah Khomeini in 1989, all predicting the correct outcomes. His consulting firm is not the only one to apply this type of software, as firms and academics across the world have used it to predict outcomes in a variety of spheres of influence, including a Dutch firm trying to sort out voting in the European Union and a British firm that attempts to solve problems in pharmaceuticals. Even the military is aided by this software, as Mesquita’s firm used game theory to decide what the impact would be of moving an aircraft carrier near North Korea.

Notably and most relevant to our class is the author’s example of using game theory in software to determine the outcomes of auctions. Robert Aumann from Hebrew University in Jerusalem, who won the Nobel Prize in economics in 2005 for work in game theory economics, implemented game theory software to correctly deduce that an incentive for the second place bidder in an Israeli auction for oil refineries actually lowered the maximum bid and lost the government more money. There are many other examples of the application of game-theory software mentioned in this article, including its role in capturing Bin Laden. Its possible future of becoming a mediator between countries is discussed as well, with its ability to harness data of each country’s values and assets serving a crucial role in creating treaties and sparing lives.

Although this article does not go into much depth about how this type of software works or even the workings of game theory, it does provide a look into all the possibilities game theory software can offer, many of which are already being used today. It shows that the rules of finding Nash Equilibriums, along with assumedly many more complicated concepts of game theory, can be successfully translated into an algorithm that can not only predict economic outcomes but apply to nearly every other facet of the political and business worlds.

Source: http://www.economist.com/node/21527025

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