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Why Study Game Theory when it has Limited Practical Applications in Real Life?

As discussed in lecture material, game theory does in fact have limited practical applications in real life. The Ultimatum Game is a prime example of this. Game theory operates behind the assumption that players are “rational”, meaning that they strictly prefer larger payoffs than smaller payoffs. On paper, payoffs are only represented by the monetary amount that the player receives. In practice, as is seen from the Ultimatum Game, payoffs also include emotions such as spite. When Player B is asked to make an offer to split his or her $10 with Player A, A must feel respected enough to the point that they’ll accept this offer rather than reject to spite the lack of generosity of Player B and send them both home empty handed. Many other factors also prevent game theory from having practical applications in real life. The article published by Mostly Economics on the interview of famous game theorist Ariel Rubenstein explains these factors and why game theory isn’t applicable.

Rubenstein begins his argument against why game theory isn’t applicable by comparing it to logic. He states, “Logic is a very interesting field in philosophy, or in mathematics. But I don’t think anybody has the illusion that logic helps people to be better performers in life. A good judge does not need to know logic.” Yes, logic is sometimes useful in determining a particular strategy to use, but it’s not always as useful in debates with friends or in analyzing information based on real life incidents. Although the facts may be laid out before you, it’s impossible to perfectly predict human emotions and other intangible factors. These unpredictable factors are where game theory applications fall short. Basically, humans are not always rational.

Although it may not be applicable, Rubenstein became well known for studying it and still believes that it should be studied because it helps provide insight into the human nature and understanding the way that we think. He doesn’t believe, however, that game theory logic has ever been able to provide exceptionally useful insight to real life scenario where someone can use theoretical logic to, for example, catch a criminal. Of course shows like Sherlock and Numb3rs glorify game theory and logic examples, but in practice, humans are not that predictable. Once again, players are not rational. Once rationality is taken out of game theory, all theorems unravel to nothing.

Link: http://mostlyeconomics.wordpress.com/2012/06/08/why-study-game-theory-when-it-has-limited-practical-applications-in-real-life/

 

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