Game theory is a mathematical concept that is used to analyze how individuals make decisions in strategic situations. It is often applied in economics, political science, and other social sciences. However, the question arises – Is Game Theory Applicable to Real Life?
Game theory assumes that individuals are rational and will always make decisions that maximize their own self-interest. It also assumes that every individual has complete information about the game they are playing, which means they know the rules, their opponents’ strategies, and their payoffs. In reality, this assumption rarely holds.
Real-life examples of Game Theory:
One real-life example of game theory is the prisoner’s dilemma. Two criminals are arrested for a crime they committed together.
They are interrogated separately and offered a plea bargain: if one confesses and the other doesn’t, the one who confesses will receive a reduced sentence while the other will receive a harsher punishment. If both confess, they will both receive a reduced sentence but not as much as if only one person had confessed. If neither confesses, they will both receive an average sentence.
This scenario can be analyzed using game theory to determine what strategy each criminal should take. The dominant strategy for each criminal is to confess because no matter what the other person does, it is always better for them to confess than to stay silent.
- Another example of game theory in action can be seen during auctions where buyers bid against each other to purchase an item.
- Similarly, political elections can also be viewed as strategic games where candidates compete against each other to win votes.
- In business settings too companies engage in strategic competition with their competitors.
Limitations of Game Theory:
While game theory has proven useful in analyzing strategic interactions between individuals or groups and predicting outcomes based on rational choices made by players, there are some limitations to its applicability in real-life situations.
One limitation is that it assumes perfect information and rationality on the part of each player. However, in reality, individuals may not have complete information about the game they are playing, or they may not always act rationally.
Another limitation is that it assumes that each player is only concerned with their own self-interest. In real life, individuals often make decisions based on a combination of self-interest and concern for others.
In conclusion, game theory can be useful in analyzing strategic interactions between individuals or groups and predicting outcomes based on rational choices made by players. However, its assumptions of perfect information and rationality may not always hold in real-life situations. Despite its limitations, game theory remains an important tool for understanding human decision-making in strategic situations.