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Modern Practical Applications of Game Theory

Consulting firms have been helping clients to either create auctions that are more profitable or to help clients win them at a price lower than their true value. Through software they analyzed bidder’s activity and found the cases where the items were overvalued. This determines that it can be more profitable to attain more, but less expensive items. These analyses using game theory can also help avoid seriously costly mistakes that might have been based off of misconception about how people would behave. For example, the government of Israel tried to tweak the rules of a regular auction, in order to encourage more expensive bidding, by awarding a large monetary to the second highest bidder. However, instead bidders bid less than they normally would because they wanted the prize, and Israeli government ended up losing a lot of money. This could have been prevented by properly predicting people’s behavior using game theory, to determine that the best strategy for the players was to bid lower than their true value in order to win the $12m prize.

Game theory has also taken on practical applications outside of the realm of economics. It is also being use to predict political outcomes and to locate wanted terrorists. Now there are also hopes to develop software that could assist with tricky negotiations and mediations between nations.  The applications of game theory are clearly growing and will continue to be of use not only for the purpose of making profits, but also for predicting other complex human behaviors.

Based on the following article from The Economist: http://www.economist.com/node/21527025

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