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From Simple to Complex: Game Theory Applications

Game theory is being used to describe and predict the outcomes of events far more complex than one might imagine. In this article, game theory, in combination with some sophisticated software, is used to solve real world problems ranging from international politics to auctions, to divorce proceedings. Based off of the state of the world, computers can determine, with surprising accuracy, how events, such as the collapse of an economy or governmental regime may come about. These predictions are based off of game theory, to determine what choices people will make that will inevitably magnify to larger outcomes. The article also discusses how guessing at the best solution without working through the problem can have unfortunate results. It uses the example of an auction for oil refineries in Israel, by the government. In this case, the government offered the second highest bid a monetary incentive to drive bids up. This failed miserably though, resulting in the loss of millions of dollars because bids turned out much lower than expected.

Even on a smaller scale though, game theory is finding unexpected uses with powerful computer software. In order to get through difficult negotiations, a mediator is often required. Although finding a mediator is often difficult due to trust and expense. But, this responsibility can now fall onto machines. Because the software allows conflicting parties to give confidential information on their bargaining positions, it can determine the best way to make decisions, using game theory that will benefit both parties. As the article concludes, it also mentions that this technology can be used to aid in divorce settlements, making sure that no one can be unfair.

This article examines several applications of game theory, far beyond what is currently being covered in class. While game theory can be applied to simple games with two players with two or more moves, it can also be applied on a much larger, and more complex scale as this article describes. The idea behind predicting international events, such as regimes falling, before they occur, is possible because of the basic ideas in class already covered. The players in this political game are just people, and they tend to make decisions that benefit themselves and their own interest. The software is able to look at the big picture, of all the players and groups that have interests in these events and predict the outcomes, just as we can do with paper for much simpler games.

The article also mentions a mistake made by the Israeli Government when trying to auction off oil refineries. At first glance, one might make the mistake of thinking that offering a monetary incentive to the second highest bidder would drive bids up, but that is not what happened. After software was used to analyze the situation, it was found that people ended up bidding lower because there was an incentive to lose the auction but gain the prize money. Game theory can be used to solve problems like this that are counter intuitive to us, such as the much simpler problems done in class. As we have seen, the simple solution is not always the best, such as when adding a road to a complex network can sometimes increase the traffic overall, just as in Braess’s Paradox.

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

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