by The current state of game theory One of the most widespread myths in economics, but also in sociology and political science, is that game theory provides “tools” that can help solve concrete problems in these branches – especially in economics. Introductory and advanced textbooks thus often speak of the “applications” of game theory that are being made, giving the impression that they are revolutionizing the social sciences. But, looking more closely, we see that the few examples given concern mostly the usual “stories” (prisoners’ dilemma, “chicken”, battle of sexes, entry deterrence, store chain paradox, centipede game, etc.) of “old” game theory … This is not surprising. Mathematical reasoning requires clear and explicit enunciation of the
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The current state of game theory
One of the most widespread myths in economics, but also in sociology and political science, is that game theory provides “tools” that can help solve concrete problems in these branches – especially in economics. Introductory and advanced textbooks thus often speak of the “applications” of game theory that are being made, giving the impression that they are revolutionizing the social sciences. But, looking more closely, we see that the few examples given concern mostly the usual “stories” (prisoners’ dilemma, “chicken”, battle of sexes, entry deterrence, store chain paradox, centipede game, etc.) of “old” game theory … This is not surprising. Mathematical reasoning requires clear and explicit enunciation of the assumptions used in its demonstrations. In particular, the assumptions concerning the information available to each player – his payoffs and those of the other players for each outcome of the game, the rules of the game, etc. – are so restrictive that there is no concrete situation in the world where they could possibly be verified, not even roughly.
It is difficult not to concur with Guerrien here. Most mainstream economists — still — think that game theory is useful and can be applied to real life and give important and interesting results. That, however, is a rather unsubstantiated view. What game theory does is, strictly seen, nothing more than investigating the logic of behaviour among non-existent robot-imitations of humans. Knowing how those ‘rational fools’ play games does not help us decide and act when interacting with real people. Knowing some game theory may actually make us behave in a way that hurts both ourselves and others. Decision-making and social interaction are always embedded in socio-cultural contexts. Not taking account of that, game theory will remain an analytical cul-de-sac that never will be able to come up with useful and relevant explanations.
Over-emphasizing the reach of instrumental rationality and abstracting away from the influence of many known to be important factors, reduces the analysis to a pure thought experiment without any substantial connection to reality. Limiting theoretical economic analysis in this way – not incorporating both motivational and institutional factors when trying to explain human behaviour – makes economics insensitive to social facts.
Game theorists extensively exploit ‘rational choice’ assumptions in their explanations. That is probably also the reason why game theory has not been able to accommodate well-known anomalies in its theoretical framework. That should hardly come as a surprise to anyone. Game theory with its axiomatic view on individuals’ tastes, beliefs, and preferences, cannot accommodate very much of real-life behaviour. It is hard to find really compelling arguments in favour of us continuing down its barren paths since individuals obviously do not comply with, or are guided by game theory.
Apart from a few notable exceptions, it is difficult to find really successful applications of game theory. Why? To a large extent simply because the boundary conditions of game theoretical models are false and baseless from a real-world perspective. And, perhaps even more importantly, since they are not even close to being good approximations of real life, game theory lacks predictive power. This should come as no surprise. As long as game theory sticks to its ‘rational choice’ foundations, there is not much to be hoped for.
Game theorists can, of course, marginally modify their toolbox and fiddle with the auxiliary assumptions to get whatever outcome they want. But as long as the ‘rational choice’ core assumptions are left intact, it seems a pointless effort to hamper an already excessive deductive-axiomatic formalism. If you do believe in the real-world relevance of game theoretical ‘science fiction’ assumptions such as expected utility, ‘common knowledge,’ ‘backward induction,’ correct and consistent beliefs etc., etc., then adding things like ‘framing,’ ‘cognitive bias,’ and different kinds of heuristics, do not ‘solve’ any problem. If we want to construct a theory that can provide us with explanations of individual cognition, decisions, and social interaction, we have to look for something else.
Applications of game theory have on the whole resulted in massive predictive failures. People simply do not act according to the theory. They do not know or possess the assumed probabilities, utilities, beliefs or information to calculate the different (‘subgame,’ ‘trembling-hand perfect’) Nash equilibria. They may be reasonable and make use of their given cognitive faculties as well as they can, but they are obviously not those perfect and costless hyper-rational expected utility maximizing calculators game theory posits. And fortunately so. Being ‘reasonable’ makes them avoid all those made-up ‘rationality’ traps that game theory would have put them in if they had tried to act as consistent players in a game theoretical sense.