Understanding payoffs
In the study of game theory, it is important to understand the payoff each player receives (depending on the strategies that all players employ). It is these payoffs that allow us to predict how each player will behave; in class, we have used payoff matrices to visualize likely scenarios for several games. In the games we have considered, the payoffs have been pretty obvious. For instance, in the case of the Prisoners’ Dilemma, one player might spend 0, 1, or 10 years in jail, depending on both his course of action and also on the other player’s course of action.
However, in real life, it is much more difficult to quantify payoffs. One game we considered was the Prisoners’ Dilemma. In class, the only payoff was the amount of jail time that would result from a particular strategy. In reality, players probably also weigh other consequences of their decision: a criminal record, retaliation from the other player, etc. The importance of each of these consequences depends on the player’s value system, and this can be impossible to predict. Nevertheless, game theory is an important tool for understanding how an average person might behave, when the payoffs have been carefully considered.
Game theory is used in real life to understand baseball players’ use of performance-enhancing drugs. Should baseball players take PEDs? Should the league test for the use of banned substances? These questions are answered by considering the payoffs for each strategy. One such payoff is the payoff players get from taking banned substances without being caught. In the article linked to this post, a group of economists looked at how offensive performance improved in the Steroid Era (1994-2004) compared with the Pre-Steroid era (1985-1993) to find this payoff. Their calculations, and the many assumptions they needed to make while making these calculations, show how difficult it is to find the payoffs for a game. When they looked at the Steroid Era, they looked at the offensive performance improvement across the league. However, many of the players during this era did not take steroids, and many players, those who took steroids and those who did not, might be offensively better than their predecessors because of better technique and strength training. Ultimately, there is no way to determine exactly how PEDs improve a player’s performance.
There is another consequence of steroids to consider; they likely shorten the user’s life-expectancy. The economists in the attached article approximated that users would lose five years of their lives, and then calculated how much the players could make in these five years through their pensions. They then subtracted this amount from the total salary increase a player could expect from using PEDs. However, most baseball players, and most people in general, would consider five years of life more valuable than the amount of pension they receive in this time. How much value does a baseball player place on the last years of his life? That is something no economist can calculate.
In conclusion, making strategic choices based on expected payoffs is not an exact science. Individuals do not always behave the way a payoff matrix would indicate. Economists can only make educated approximations for the payoff an average person will receive. Despite this, understanding game theory is an important step in understanding what motivates people, and this is vital for understanding their interactions within networks, which is the focus of this course.
http://faculty.haas.berkeley.edu/rjmorgan/mba211/steroids%20and%20major%20league%20baseball.pdf