Game Theory in a variety of fields: Prisoner’s Dilemma & Economics
One of the most popular methods to find real criminal is Prisoner’s Dilemma. In order to understand easily, here is an example from web,
Two members of a criminal gang are arrested and imprisoned. Each prisoner is in solitary confinement with no means of communicating with the other. The prosecutors lack sufficient evidence to convict the pair on the principal charge. They hope to get both sentenced to a year in prison on a lesser charge. Simultaneously, the prosecutors offer each prisoner a bargain. Each prisoner is given the opportunity either to: betray the other by testifying that the other committed the crime, or to cooperate with the other by remaining silent. The offer is:
- If A and B each betray the other, each of them serves 2 years in prison
- If A betrays B but B remains silent, A will be set free and B will serve 3 years in prison (and vice versa)
- If A and B both remain silent, both of them will only serve 1 year in prison (on the lesser charge)
This is very famous example of Game Theory which shows why two completely “rational” individuals might not cooperate, even if it appears that it is in their best interests to do so. The Prisoner’s Dilemma is a useful way to analyze people’s behavior. As a third party member, the answer is very clear; however, the decision making is very difficult if people were in the real situation. In this way, Game Theory has been used in various cases for a long time.
Not only using for people’s psychology but also estimating companies’ psychology, Game Theory is already permeated even in economics. There is an example of two big coffee companies, Starbucks and San Francisco Coffee.
| Starbucks | |||
| Don’t advertise | Advertise | ||
| San Francisco Coffee | Don’t advertise | $15, $15 | $10, $20 |
| Advertise | $20, $10 |
$12, $12 |
|
In modern days, companies should deeply think about how to advertise efficiently to audience. However, the interesting result from the above table is the best way of both companies is not to advertise to people. Then, both companies earn same and comparably high money. If one of the company advertise and the other does not, it is clear that the other company would be damaged. Thus, except for the option “Don’t advertise” together, the best option is that both company advertise together. They do not need to take any risks, and that option is pretty reasonable.
Likewise, people knows what the best option is, but they might choose the other better option even though people would take a little loss. This is a result of the psychology of competition. Game Theory is very interesting and useful to understand the behavior of human. Also, this is applicable to a lot of fields, so it is regarded as a good model since it has been developed.
Sources
– https://www.quora.com/Game-Theory-What-is-the-prisoners-dilemma-in-laymans-terms
– http://plato.stanford.edu/entries/prisoner-dilemma/
– https://en.wikipedia.org/wiki/Prisoner%27s_dilemma