Game Theory

Before delving into this topic, my understanding of game theory was limited. However, my research has illuminated why many perceive societal and business interactions as games. According to Investopedia:

> "Game theory is the study of how and why individuals and entities (called players) make decisions about their situations. It is a theoretical framework for conceiving social scenarios among competing players."

It can be described as the science of strategy, focusing on the optimal decision-making of independent and competing actors in a strategic environment.

Originating in 1944, game theory was developed by mathematician and physicist John von Neumann alongside economist Oskar Morgenstern in their work, A Theory of Games and Economic Behavior. They proposed that all economic situations can be viewed as outcomes of games played by multiple participants.

The core components of game theory include players and strategies. Players are seen as rational decision-makers, and strategies are the actions they choose based on the game's circumstances. Typically, these strategies revolve around self-interest and expectations of others' actions.

Other Elements of a Game

There are various forms of game theory, including simultaneous/sequential, cooperative/non-cooperative, and zero-sum/non-zero-sum games. Regardless of the type, certain principles must apply.

For a scenario to qualify as a game, all players must be aware of the rules, the strategies available for winning, and the rewards for success. A game concludes when a player reaches equilibrium, making a decision that leads to a specific outcome. Commonly, it is assumed that players will behave rationally and make choices driven by self-interest.

The "Prisoner's Dilemma" is one of the most famous illustrations of game theory:

Imagine two suspects arrested for a crime. Lacking strong evidence, police separate them and present four possible outcomes:

1. Both confess, each receiving a three-year sentence.
2. If Suspect #1 confesses while Suspect #2 remains silent, Suspect #1 serves one year, and Suspect #2 gets five years.
3. If Suspect #2 confesses and Suspect #1 does not, Suspect #1 faces five years, while Suspect #2 serves one year.
4. If neither confesses, they both serve two years.

Game theory suggests that the optimal choice is for neither to confess, resulting in a two-year sentence for each. However, due to lack of communication, each suspect is likely to act in their self-interest, leading to a worse collective outcome.

Game theory's applications extend beyond dilemmas, encompassing everyday situations such as poker, rock-paper-scissors, and even conflict resolution in business and warfare.

Economic Theories

For a long time, I found economics to be an elusive concept. Ultimately, I realized it is simply a social science examining how individuals respond to various circumstances and changes.

The American Economic Association defines economics in multiple ways, summarizing it as:

> "[Economics is] the study of scarcity, how people utilize resources and respond to incentives, or the study of decision-making. It encompasses topics like wealth and finance but extends beyond just monetary concerns."

Economics encompasses a range of situations, from individual choices like family medical debts (microeconomics) to broader issues like national debts (macroeconomics).

Current economic game theories generally operate under the assumption that people make rational decisions based on prior experiences, with individuals striving to maximize their gains. This belief hinges on the notion that humans are inherently rational decision-makers, tending to prioritize known information while often neglecting emotional factors in their choices.

However, research, particularly in marketing and advertising, suggests the opposite: our decisions are frequently driven by emotional responses.

Physicist Jérôme Garnier-Brun at École Polytechnique in France expressed surprise at the persistent economic beliefs about human behavior, as they conflict with natural observations.

New Research

In nature, most interactions typically lead to chaos rather than stability. To investigate whether economists' assumptions about learning from the past hold true, Garnier-Brun and colleagues created a mathematical game involving hundreds of theoretical players representing a large economy.

In this game, each player could choose between two actions—such as buying or selling a stock—and interact with one another. Their decisions were influenced by past experiences, allowing for learning.

The researchers manipulated various factors, such as the extent to which prior experiences shaped future decisions and the degree of cooperation among players. By modeling different game scenarios, they aimed to test the hypothesis that learning helps players avoid chaos.

If economists were correct, most scenarios would demonstrate that virtual players eventually stabilize, winning the game. However, the findings contradicted this expectation.

The Results

The study revealed only one scenario where all virtual players achieved "optimal" performance, which occurred when a "centralized, omniscient agent endowed with enormous computing power" made decisions. In all other instances, regular players reached satisfactory outcomes, meeting minimum expectations but not exceeding them.

While players learned more than if they acted randomly, their performance fell short of what could have been achieved through optimization. Ultimately, the combination of simulations and analytical reasoning led researchers to conclude that while long-term memory of beneficial experiences can promote stability, overreacting to recent events tends to result in chaos.

The study also found that increased competition destabilizes fixed points, often leading to chaotic outcomes. Interestingly, some randomness in the learning process enabled the players to make better collective decisions.

One more positive outcome was noted: the learning process allowed cooperative systems to coordinate around solutions that yielded high but sub-optimal average rewards.

French physicist Jean-Philippe Bouchaud remarked on the implications of their findings, suggesting that the notion of humans always making complex economic calculations and learning to be the most rational agents should be reconsidered.

This simple game model cannot accurately predict real-world behavior but serves as a challenge to economists to rethink their assumptions about social behavior, including how they set interest rates or merchants select suppliers.

Perspective Shift

In our studies of various fields, from the Earth to consciousness, we often forget our interconnectedness. Our tendency to view ourselves as separate from our research findings can obscure our own vulnerability to those very results.

While we may consider ourselves rational decision-makers due to our capabilities, this research is a reminder that we are also emotional and often impulsive beings. Some may perceive this as negative, but it opens the door to a future where we acknowledge and integrate all facets of ourselves. Emotions hold equal significance alongside logic, and it is time to embrace both rather than categorizing ourselves as solely rational or emotional.

This article was initially featured in the author’s free newsletter, Curious Adventure. It was edited and republished on Medium with her permission.

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