Game Theory in Practice
Computer aided models that use the basics of game theory to construct algorithms are used by economist and politicians to predict how events unfold in response to the society acting in their best interest. In this mathematical model, specific values are assigned to goals, motivations and influences (both to and from the players). The computer model then simulates all possible options and outcome to that environment. Hence, predictions on likelihood of event or how one should act to a particular situation or event can be determined from the numerical value associated with each outcome.
The success of computer-aided models is shown through Dr. Milgrom’s software during the 2006 online auction radio-spectrum licenses by America’s Federal Communication Commission. Game-theory software is used to help bidders. The software predicted bid values of bids other bidders placed on each specific licenses (1,132 licenses in total). One of the assumptions used is that big licenses were being overvalued. With help from computer models, Dr. Milgrom directed his clients (Time Warner and Comcast) to go for smaller licenses. As a result the client paid a third less than their competitors (saving around 1 billion).
Outside economics, game theory also proves to be potentially very useful. One example is the army using game theory software to predict political and social impact resulted from movement of aircraft carriers. Potential terrorists hideouts are simulated by feeding information in terms of his ‘likes’ (Family information, where he lived, record of travel etc) and ‘priorities’ (hidden, escaping etc) to the software; after that, the software predicts possible hideout environments and places. This kind of game theory software was reported to be an important role in finding terrorists like Osama Bin Laden.
Computer aided software can also be used in place of neutral mediators, especially if they are accused of lining up to one particular side. The idea was to let each negotiator feed credential information into the software. However this software is new and still needs testing. As seen from the above examples, game theory based software proves to be extremely useful in all fields. Consulting company usually charge as much as $28,000 to $10,000 to run this simulations because sophisticated customization and information feeding needs to be perform. It is impossible for game theory to always yield the correct prediction, because of the complexity of the world. However, as technology progresses and knowledge of game theory increases, a more accurate model will always be achieved.
http://www.economist.com/node/21527025
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