In this article, we will be studying the topic “What Is Game Theory?. Also, we will look at the topic’s relationship with blockchain, theories, equilibrium , players, etc.
Game theory is a method one applies in order to create a brief interactive environment. This equally gives researchers the access to create the way people will react to certain behaviours.
Meaning of Game Theory
John von Neumann is the founder of game theory. It is one of the theories that people mostly apply while studying economics. Game theory is simply defined as a method one applies in order to create a brief interactive space. This in turn grants access to researchers to help create the way people will react to certain behaviours.
List Of Game Theory Examples
The prisoner’s dilemma is one of the most popular game theory illustrations in action. It is a game in which the players have no motivation to hurt each other. They are also encouraged for not causing harm to each other. It was made as a thought experiment whereby two persons are add variables together. There is lack of cooperation in the game.
We can equally see it in aspect of the digital assets marketplace. Let’s consider the Bitcoin market, it has two types of investors, namely: Long-term and Short-term investors. The former buys when the market is less volatile while the latter deals with high volatility. Thus, each type of investor has two strategies they can use, but it all depends on the action of their opponents. Every investor behaves the way he or she wants, they all compete for similar rewards as they contribute to the growth of Bitcoin. Game theory monitors two different individuals as they interact with each other and react to opponent’s actions. This is a suitable use of game theory.
Elaboration On Game Theory
Game theory is a standard set to portray social activities among participants. From a different perspective, it is the study of strategic planning and decision making of players.
- Game theory is a standard set to show social happenings among participants. They also offer strategic planning and decisions made by participants.
- One can predict the results of pricing challenges and release of products when using game theory.
- Real world scenes are the prisoner’s dilemma and the dictator game, etc.
Operation of Game Theory
John Nash is a mathematician that was known for creating the first important continuation of the von Neumann and Morgenstern work.
The aim of game theory is to make a game that serves a medium of interaction among consistent players. Also, that the strategy a player implements will determine the other player’s payoff.
The game recognizes the identity of participants, their choices, as well as their strategies and how they affect results. Other estimations or opinions can be of help depending on the means.
Despite the improvements of game theory, it is still at its early stages. However, they can be of help in the areas of psychology, evolutionary biology, war, politics, economics, and business.
In game theory, the player’s decisions and behaviours results of each. An estimate was made that all the participants are consistent and are ready to maximize their profits through hardwork.
Explanations of Game Theory
Game theory determines the results when there are two or more players that involve known payouts or measurable outcomes. Below are common fame theory terminologies and their meanings:
- Game: This is standard that produces results on the basis of players’ behaviours and decisions.
- Players: This is an individual that takes a strategic decision and also takes part in the game.
- Strategy: This is a set of plans a player executes when the unusual situations starts to occur in the game.
- Payoff:This is known as the reward a player receives from getting certain results. It can be in form of fiat currency or another asset.
- Information set: This is the details of the game data given at particular phases of the game.
- Equilibrium: This is a point in a game where both players have made their decisions and agreements made as well.
The Meaning of Nash Equilibrium
Nash Equilibrium is an agreement made between players. The achievement of this means that no player can maximize profits just by partially changing decisions. Also, in Nash Equilibrium, once you make decisions, you will not regret them knowing the possible outcomes.
Sometimes, it takes a long time to attain the Nash equilibrium. Once that is done, there is no room for deviation. We are going to be checking out how partial movements can affect the Nash equilibrium. But before that, we will treat the methods of identifying Nash Equilibrium. Generally, there can be more than one equilibrium in a game.
However, this usually happens in games that are more features than just decision making by 2 players. With the help of trial and error in games you play in sequence, one can attain one the multiple number of equilibrium. Atimes, two companies try to make decisions on prices for fungible products. This is when the style of making different choices before reaching equilibrium becomes very common.
Effects of Game Theory on Economics and Business
Game theory has been of help lately in settling the issues that relates to mathematical economic models. The neoclassical economics finds it difficult to understand entrepreneurial anticipation. The were unable to cope with the inadequate challenge. Game theory shifts focus to market process and no longer steady state equilibrium.
In business, game theory is beneficial for building behaviors between competitive economic agents. Businesses usually apply strategies that affects their gain recognition potentials. Let’s look at an instance, businesses may be uncertain about dropping old products or creating new ones, lower prices relative to the competition, or using new marketing strategies. Game theory usually helps economists to comprehend oligopoly firm behavior. It is also useful in making assumptions about similar results when firms engage in price-fixing and collusion.
What are the Types of Game Theories in Existence?
Cooperative and non- cooperative game theories are the most common among other types of game theories.
Cooperative game theory
It deals with how cooperative groups interact when rewards are the only obvious things. Also, it is a game between group of players rather than just individuals. It keeps people wondering how these groups exist and how they share these rewards to players.
Non-cooperative game theory
On the hand, this deals with how consistent economic agents compete amongst each other to achieve their own goals. An example is the strategic game, they only display the available strategies and the result of choice combination. However, the rock-paper-scissors game is a real life application.
What are the Examples of Game Theory ?
The following are going to be our focus even though they are not the only existing examples.
The Prisoner’s Uncertainty
This is the most popular of them all. Let’s use two criminals caught as an instance. Officials have no hard evidence to declare the criminals guilty. However, to hear a confession from the prisoners, they remove them from their individual cells and interrogate each one in separate chambers. None of the prisoners can interact with each other. Officials offer four criteria, usually in form of a box with two rows and columns respectively. They are:
- If both confess, they will each serve prison sentence of 5 years.
- Also, if the first confesses, but second one does not, the former will stay three years in prison and the later will stay nine years in prison.
- If the second prisoner confesses, but the first one does not, the latter will stay 10 years in prison while the former gets to stay only for 2 years imprisonment.
- More so, if none of the two prisoners confesses, each will serve two years imprisonment.
The last one is the most suitable criteria. But none of them are sure that the other person will not confess. They may end up confessing and serving the first punishment. The Nash equilibrium suggests that it is best for each player to choose the idea that will not affect them much than the worst. This suggestion was made since they are not sure of the outcome.
The equivalent given in return is the best strategy for a prisoner’s uncertainty. Anatol Rapoport is the man behind that strategy. He made a strategy in which each participant in a sequential uncertainty of prisoners chooses an action constant with the previous turn of their counterpart. A player retaliates if you annoy him or her and cooperates if otherwise.
In this game, the first player makes sole decisions on how to share profits with the second player. This is more like dictatorship in terms of governance. It gives some interesting brainstorm about people’s actions despite not being the main game theory. There has been an investigation and the outcome is that about 50% of first players keep all the money to themselves, 45% gives its partner smaller ratio. Only 5% shares equal profits.
The dictator game is similar to the ultimatum game. The first player is given some amounts of money to share with the second player whom has the right to accept or decline the profit. But the difference is that both players are mutually beneficial to each other in the sense that both of them gets nothing if the second player rejects the money. However, the two games provides solutions to issues like charity donation and philanthropy.
Someone has to take up a function that will benefit everybody but if nobody shows up, it can result to a downfall. Let’s look at a company that experience accounting fraud on a regular basis without the knowledge of the upper hand. The accounting sector hides the incident to prevent the victim from loosing his or her job.
Atimes it is not good for your colleagues to see you as one who always reports crime. But on the other hand, if they keep hiding all the frauds, the company will eventually collapse. In this way everyone is at loss.
The Centipede Game
This game is more of a continuation. Here, both players have equal chances of being the one in charge of the sharing. The storage medium increases slowly as time goes on. They set it in a way that if player A transfers the storage medium to player B, the former receives less share unlike choosing the pot instead.
The last player with the storage medium gets the lion share amongst al other players. Each player already knows the total number of rounds that storage medium will pass through even before the game starts.
Factors Affecting Game Theory
Just like other economic entities, game theory depends on an estimation. It says that players are consistent, selfish and wants to maximize the use of the game. As a human being, that behaviour should not be a surprise to anyone. Game theory is not responsible for the consequences that may result from such actions.
The Games Featured in Game Theory
The name game theory implies that it is trying to figure out the behaviour of two or more players bound by rules and regulations. It is very crucial to the study of business and economics. Also, it can be all about the way the two participants will react to fall in price by one another. It can also be about decision of whether a company should get another more. Theoretically, we classify games into prisoner’s uncertainty, the dictator game, the hawk-and dove, and Bach or Stravinsky.
Estimations About Game Theory
There are certain strict estimations that are very necessary for the progress of predictions. First, all the players are aware of the full details about the game, they are just consistent individuals that use the games to the peak. They equally know the rules and outcome of the game theory. There is no room for interaction among players. Nobody can change possible results even though players are already aware of them. In theory terms, there is no limitation to the number of players but some just set it at two players.
Definition of a Nash Equilibrium
The Nash equilibrium is an important tool to game theory. Also, Nash Equilibrium is a constant situation whereby no players benefits from partially changing method of approach. This is only valid if the other competitors do not tamper with theirs. John Nash is the founder of the Nash equilibrium. The Nash Equilibrium solves the issues of a non-cooperative type of game theory.
The Founders of Game Theory
John Von Neumann is a mathematician who partnered with Oskar Morgenstern who is an economist. Both of them are the people responsible for the invention of game theory. Many years later, other researchers and scholars took over from them researching more about it till date.
Real-Life Applications of Game Theory
One can easily apply the concept of game theory to his or her daily activities. There are examples out there to guide you on the good and bad operations of game theory.
The main function of a game theory is analyzing motivations and decision making.
Some experts believe that below are some real life applications of game theory that are common:
- We can understand the possibility of separate activities to be put to control by luck via statistical analysis.
- Traditional economics fully illustrates the capabilities of a consistent, selfish and well informed player.
- Game theory analyzes players’ decisions on a given condition.
The use of Game Theory in Politics
People that claim to be resistant to change have some different attitude about that. Voters don’t usually prefer political parties in the U.S.
Game theory helps to predict voter’s reactions to defective decisions between two parties. It also predicts how the following affects a voter’s choices: advertisement, news coverage, other elections and relevance of various problems.
Political parties and candidates are not left out as well.
The Use of Game Theory as a Predictor of actions of Consumers and Investors
Game theory does a similar job of prediction to consumers and investors in all areas. The selection of higher education is a good example from my own opinion.
The higher the number of people that needs certificate of higher institutions, they less important they are to job procurement.
Let’s now apply this to game theory, we will equally witness intelligent players looking for cheap certificates and occupation as well.
This is difficult for those that are too social and those that want to impress their family. However, with the above explanation, we predict what education might be in the future. At some point, the value of certificate gotten from higher institutions is going to overcome enrollment.
The use of Game theory as a medium for an explanation of past events and situations
Game theory makes analysis on the costs and benefits attached to each player. By doing so, the best results surface. It is equally beneficial in areas of business, psychology, biology, economics, political science, computers, etc.
It also describes past activities and conditions. At the same time, it estimates what players might do in the coming years.
Business managers can read the mind or thoughts of their participants. In the situation where a competitor’s response depends on the behaviour of his or her counterpart, game theory becomes crucial.
Furthermore, we can check other real-life applications of game theory:
The use of Game Theory as a medium for general negotiation between parties
When we bargain or negotiate with each other, we do so through game theory.
Let’s take strike as an instance. Federal students will be familiar with this instance. The management demands higher salaries in order to call off the strike. There is a possibility of increasing the public assistance of both workers and control to reach a perfect solution.
Game theory is also useful when negotiating price of salary. Important discussions or negotiations made between suppliers and the management is usually done with game theory.
The use of Game Theory for decisions about a new product
Businesses consult game theory when making decisions of the launch of a new product. A businessman can understand the advantage of being early, the plans of participants with respect to new products and defensive plans. All are made available by game theory.
In the trading market, they help traders with when buy or sell as well closing orders in a new market.
The use of Game Theory in Price selections
It also helps consumers and retail traders to fix price of goods and services. Retailers usually sell complementary goods at cheaper rate in order to gain more customers.
We normally witness offseason sales in the retail shops on clothes with sweet discounts in order to attract more customers. Retailers and consumers are the main focus of this game. Consumers likes making purchase with discount and retailers on the other hand use attracting price tags for their products.
The use of Game Theory as the cause of the rise and fall of Bitcoin
Most people use the game theory with little or no knowledge about its operations. Let’s look at the calculation of variables in Mathematics. We are simply making our calculations based on assumptions. So we just want to compete with others.
Stock trading is another popular instance. Well let’s not forget the crypto trading which deals with high volatility and risks. If an investor wants to buy a particular cryptocurrency, he or she first considers its volatility. A rise in price shows that buyers are greater than sellers at the moment.
One of the greatest twitter influencers is Elon Musk. If he tweets a negative news about a particular coin, holders of such coin starts to sell out of fear. They also sell due to the assumption that other holders will equally sell theirs.
Therefore, the increase and decrease of a crypto price occur due to game theory. The same thing applies to the gain or loss made by the investor that decided to buy a crypto.
In contrast, the investor made profit or loss because he or she was busy predicting the actions of other investors. Elon Musk becomes the real agent of game theory in this situation. However, he also followed the theory by putting fear in holders.
In-game theory, winning is not a full guarantee. Some days you win, some days you don’t. You cannot force the system to favor you rather a wise investor will make sure the wins are bigger than the losses.
The use of Game Theory in Participation campaigns fuelled by matches and challenges from big donors
Here, you get to choose between allowing everybody and few people to participate. It is known as the donor and dollar goal respectively. According to the Scale Funder platform, the donor goal campaigns generates more money on average level.
Supporters can easily admit being the next donor than the main focus. Also, seeing a group of peers show interest in any amount really attracts more people. For this reason, the campaigns done on the basis of being active generates more funds.
Huge donations made helps to build more confidence in achieving the goal. However, they can also oppress those that made an average donation. Therefore it is a big boost to encourage people to make a move.
The use of Game theory in real estate negotiations
Although, many are unaware of this, they are useful in real estate transactions. The game is made a bit easier in terms of real estate because most of negotiation intentions are known initially.
But the situation is not the same in multi-offer transactions.
Once you submit a bid, the real estate agent lets you know that you in a multi-offer condition. They also present 3 options to you, they include:
- keep your previous offer
- withdraw your previous
- increase your price
In order to win, the last option is very necessary. Also, you have to bid an exact amount on the price tag of a house to claim it as yours. If someone outbids you and wins, just know that you played your part very well.
There should be no feeling of disappointment of any kind because you made no mistakes during the decision making process.
The use of Game Theory in playing monopoly
In the monopoly game, we take our turns to move our token by ourselves, once we land on the box, we receive series of instructions. They are: pay rent, pay the bill, buy the land, take a chance card( for lucky ones).
With time, you have to combine people’s skills with your negotiation skills in order to win the monopoly game. You must also plan your decision well before you land in a particular box.
The above process applies to our real-life decision making to achieve our goals. It relates to our day to day activities of chasing our dreams.
The basic rule of game theory is a dependency on every player taking consistent decisions
Some people believe that game theory applies to all our daily activities, but I don’t think so. Let’s check it out.
However, the basic rule of game theory is that it depends on every players making consistent decisions. This applies to both cooperative and non-cooperative gaming system. Human emotions comes in when humans involves themselves and real stakes being risky too. This automatically removes the game theory decision-making process before it even starts.