Game Theory
Let The Games Begin
Game Theory is one of the most exciting developments mathematics has brought to the field of economics. Game theory is so compelling that it seems like there are no shortage of academics vying for the credit of it’s creation. The Department of Defense played a pivotal part in it’s implementation in military conflicts, and remains one of the practices most earnest practitioners. What we know for certain is that genius academic John Nash played an integral role and won a nobel prize for his efforts. An accessible rendition of what game theory is all about can be found in the Academy Award-winning bio-pic about his life, 'A Beautiful Mind', based on the book of the same name. Some of the most impressive achievements of late have been the application of game theory into the world of behavioral economics, where complex algorithms and mountains of data are used to construct predictive models that serve in analyzing human decision making in everything from shopping habits to the very core of geopolitical events.
Game theory is in essence the study of strategy. It takes the perspective that interested parties where are players in a complicated game, armed with competing resources, engaged in an effort to maximize their own best interests. Information asymmetries is what makes it interesting. Everyone is trying to outguess their opponents. They know things about themselves and others, and no one is real interested in showing their hand. The condition of uncertainty prevails, adrenaline courses through veins, guaranteeing that, if nothing else, and it keeps everything interesting. Outcomes are important, sure, but the varied paths taken toward those outcomes is where the action is, and where real learning takes place. If the game is a practice situation, then learning is the important end. But as it pertains to the game itself, all that preparation — All the dry runs and drills, are ultimately about showing up on game day and leaving it out on the field.
'Look Forward, Reason Back'
The most concise way to describe how game theory works is contained in the phrase, ‘Look Forward, Reason Back’. Scenario analysis is at the heart of game theory. imagining every probably outcome, the expected reaction of each player, and each iteration that follows. The most interesting games don’t proceed in the stepwise ‘You move, then I move’ fashion. They exist freely-floating in time-space, and the rules are ill-defined. The term ‘rules’ is used to match the language of game theory, but it might be more instructive to think about the term ‘constraints’ instead, as the nature of real-life games can be characterized as zero-sum, and with incredibly high stakes.
The notion of an endgame is that winner(s) and loser(s) are about to suss themselves out. But it’s important to remember that the condition of endgame necessarily precedes the beginning of another game, albeit an evolved game where the rules and conditions have definitively changed. If you understand that, you have a good idea about what ‘Look Forward, Reason Back’ means.
By constructing favorable endgame scenarios, and using those ends as the guide for your anticipated moves in conjunction with the expected (and unexpected!) moves of the other players, a more thorough understanding of the game, and ostensibly a better strategy can be formulated before the game even begins.
Shooting Stick
'Albino Alligator', and is about a hostage situation in a bar. (Only broad strokes here, as the Ambidextrous Economist has his own rule about only spoiling one movie per article.) In short, the story of an albino alligator is about a tactic making an intentional sacrifice in order to pursue a more important goal. In an apocryphal story told by William Fitchner, every once in a while an alligator is born without the necessary skin pigmentation it needs to develop. The inability to process necessary Vitamin D from the sun is believed by some to be the proof that alligators don’t live in New York City sewers. In reality, albino alligators exist, they just happen to be pretty rare.
The tactic, as it’s explained over a game of barroom pool, suggests sacrificing a supposedly genetically doomed progeny in favor of the rest of the pack, a course of action that NOAH (the National Organization for Albinism and Hypopigmentation) rightly took exception to. As it played out on the pool table, it suggests a defensive shot - losing your turn at the table, but placing the cue ball where your opponent doesn’t have a shot either.
The former is just one tactic used. Some of the so-called ‘moves’ in a game are simply to create a holdup, delay, spread misinformation, or ‘bluff’ as it’s known in poker. The jockeying for position and maneuvers intended to increase leverage define both where the game is played and which party ultimately comes out on top.
Global Thermonuclear War The Cuban Missile Crisis delineated the point in time where game theory became the order of geopolitical history. Krushchev and Kennedy were at odds over the USSR’s decision to install nuclear missiles in striking distance of the American homeland from the nation of Commuinist-held Cuba. The USSR’s maneuvers were a response to the United States’ own armaments put in place in Turkey. In the context of the escalation of the Cold War, it’s difficult to determine exactly when the game began, but the critical nexus of the conflict came when the Kennedy ordered a naval blockade of Cuba, by all definitions readily accepted, an act of war. As the world held it’s breath, the Soviet warships headed to Cuba were turned around at the last minute, avoiding what was sure to be the start of a third World War.
Kennedy had been tested prior to this, unbeknownst to him at the time, by the Joint Chiefs. The controversial exercise was meant to test Kennedy’s readiness in the event of nuclear escalation, and Kennedy’s adoption of a wait-and-see in the face of an exaggerated nuclear aggression threat fell right in line with what experts have come to describe as Mutually-Assured Distruction (MAD). When the situation came to bear in real life, Kennedy had already been put to task.
One portrayal about the absurdity of wholesale nuclear destruction is depicted in the game of ‘Eschaton’ by the late David Foster Wallace in his brilliant novel ‘Infinite Jest’. Since ‘Infinite Jest’ runs over a thousand pages, consider watching a game of Eschaton as it appears in the novel shown The Decemberists’ video ‘Calamity Song’ instead:
Perhaps the most popular fictionalized scenario depicting Mutually-Assured Destruction comes from the following clip from the 1980’s movie ‘War Games’ when Joshua, the artificial intelligence capacity of the War Operation Plan Response (WOPR) computer runs through all the possible eventualities, quickly burning through all the permutations of the game Global Thermonuclear War by playing Tic-Tac-Toe against itself. Ultimately, Joshua arrives upon the solution that the only way to win the ‘strange game’ of Global Thermonuclear War is not to play at all...
The last lesson of War Games in the discussion of game theory is subtle, but poignant. Why not play chess instead? If you’re not happy how the game is turning out, you can always change the game.
AE - 09.15.2011
The Ambidextrous Economist is playing games with your heart. Send your questions to AmbidextrousEconomist@gmail.com.