Game theory as a tool

“Game theory” isn’t a piece of social science; it’s a piece of mathematics usable by social scientists and others to help understand the world.

Michael Mandel wonders why his attack on game theory brought denunciation from economists and quasi-economists across the political spectrum. My answer: for about the same reason he would have gotten static from us if he’d attacked the differential calculus.

“Game theory” is a branch of mathematics usable by social scientists, not a social-scientific theory. It’s a deductive account of what will happen if actors act so as to maximize their own outcomes in situations in which the outcome for each depends on the behavior of others as well as his own. It doesn’t predict anything about the real world, any more than algebra predicts anything about the real world.

In order to generate predictions using game theory, you need to add some facts: about the outcomes of different combinations of actions, about what the actors want, and about their rationality (vel non). Given such assumptions, it is possible to compare the results of real-world events to game-theoretic conclusions.

When they match, then it’s reasonable to think that you have correctly identified the outcomes as the players evaluate them and that the players are acting as selfishly rational actors. When they don’t match, then either you’ve got the outcomes wrong, or the players aren’t trying to act selfishly, or they’re trying to act selfishly but making mistakes.

By using money as the outcome and making sure that the participants understand the situation, experimenters can narrow the question down to whether the players are trying to act selfishly. Where their behavior doesn’t match game-theoretic results, as it frequently doesn’t, for example, in the Ultimatum Game and Public-Goods Contribution experiments, you’ve got a quite powerful finding; that’s why behavioral economists have made so much use of such simple experimental games. Those experiments don’t make any sense without game-theoretic results as a baseline.

In terms of real-world applications, if I want to act rationally (in the economist’s sense of that term) myself, and have reason to think that someone I’m interacting with will also act more or less rationally, then game theory can help me figure out my optimal strategy. (Raiffa’s Art and Science of Negotiation, for example, is written from an entirely game-theoretic viewpoint.)

The Nash Equilibrium, the Prisoner’s Dilemma, the difference between one-play and repeated games, the difference between constant-sum and variable-sum games, first-mover advantage (or disadvantage), focal points: these are all vital tools in any analyst’s toolkit. Mandel can take them away from me and my colleagues only by prying them from our cold, dead fingers.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: