A game is a competitive activity comprising chance, endurance, or skill, played against a set of rules. The Game of Life, The Milton Bradley board game, or the basic Tick-Tack-Toe, none of them are far off their mark when looked under the light of game theory in behavioral economics. Learning the concept of game theory helps people, businesses, and institutions develop strategies that support their objectives and expectations.

Our lives resemble games to a great extent, where everyone, including ourselves, are players expected to play by rules. The game of life is a race to win, where we constantly develop rivalries and teams.

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Game theory offers prototypes and simulations for theorizing the interactions and exchanges between competing persons.

Despite the concept being termed as a 'game', it isn't limited to the study of games. Instead, it covers a wide array of applications ranging from psychology to economics.

Now, thinking, why would one study game theory? It offers a framework for helping individuals reach optimal decisions in a competitive environment. Indeed, numerous schools and online educational centers offer game theory courses. Still, many fail to teach the application side of game theory, which is why you need to opt for a reliable and qualified learning center to open your possibilities for growth, and which is why Superprof is the right decision for students. It has a team of certified and qualified professors who are expected in their respective fields and are available to help you achieve your goals.

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What Is Game Theory In Simpler Words?

In simpler words, game theory is a standard technique used in economics to consider contributions made across various spectrums of interests. The economic application of game theory involves analyzing and evaluating economic phenomena like auctions, votes, political economy, bargaining, experimental economics mechanism design, and behavioral economics. It's generally applied to determine strategies in the business ecosystem.

While ideas relating to the Game Theory were proposed for a long decade, it was originally coined in 1928 by John von Neumann in his book, "Theory of Games and Economic Behavior," which formalized the field.

Generally, game theory is a mathematical approach to modeling behavior and assessing strategic decisions made by interacting players. It uses mathematical techniques to define and evaluate coordination, conflict, and cooperation in various situations. It is an area of standard experimental economics that functions around the assumption of a self-interested rational maximizer, also known as homo economicus.

An essential aspect of any game is the conflict between 2 or more parties, resulting in a win and lose scenario. Besides this, all games have characteristics that make them exciting and playable. In the same respect, game theory has specific characteristics:

  • Every player has the right to be selfish
  • Every participant is interested in winning the game
  • Two or more players have their preferences and need to decide on choices
Monopoly board game with dice, cards, and yellow houses
The conceptualization and principles of game theory play a vital role in helping economists as well as psychologists understand and predict certain behaviors and their outcomes. (Source: Pixabay)

Behaving reasonably and rationally

Significance Of Studying Game Theory

Learning game theory is important because it provides a framework for understanding different choices that can be made during diverse situations among competing players. It helps players reach optimal decision-making, especially when confronted by independent actors in a strategic environment.

The practical application of games offers valuable tools that support analyzing and assessing various markets, industries, and other strategic interactions.

Studying game theory from behavioral economics offer insights into the real-world scenarios of product releases, price competition, and prediction of their outcomes. In order to gain a better understanding of game theory and learn its practical applications in the field of behavioral economics, turn to Superprof.

How And When Is Game Theory Applied?

The game theory is applied and explored across a range of disciplines and is not only limited to philosophy or economics. The application of game theory is fascinating when examined in the context of psychology and human behavior.

Additionally, the application of game theory involves tools and techniques that help professionals working in economics, operations, finance, research, retail marketing, and politics to analyze their decisions.

When we restrict choices available to players, it gets easier to investigate and systematically evaluate the decision-making process—the path chosen by the player results in a predefined outcome, which is analyzed in detail.

One widely covered application of game theory in behavioral economics is Prisoner's Dilemma.

Here, two prisoners are confronted by investigators with a probability of either following or betraying their fellow prisoners or staying silent. They are also given the consequences of their decisions, such as;

  • Keeping silent will result in one year in prison
  • Both betraying each other would result in 2 years in prison
  • If one betrays and the other doesn't, then the betraying one would be set free, and the other prisoner will serve three years in prison

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Application Of Game Theory In Behavioral Economics: Prisoner's Dilemma

 Prisoner 1 stays silentPrisoner 1 betrays
Prisoner 2 stays silent1 year in prison for bothPrisoner 1 is set free, and prisoner 2 gets 3 years in prison
Prisoner 2 betraysPrisoner 2 is set free, and prisoner 1 gets 3 years in prison2 years in jail for both
A game of chess
Wondering what is game theory from a behavioral economics perspective? It's a mathematical approach to understanding and analyzing behaviors and their outcomes. (Source: Pixabay)

More examples of the application of game theory in the context of behavioral economics include;

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What Is The Application Of Game Theory In Behavioral Economics?

S. No.Game Examples
1.The game of chicken
2.Centipede game
3.Diner's dilemma
4.Bargaining problem
5.Dollar auction
6.Dictator game
7.Matching pennies
8.Deadlock
9.Cournot competition
10.Battle of the Sexes

What Are The Types Of Game Theory?

The different types of games within the game theory help with the evaluation of diverse issues and challenges. These games are made based on the number of participants, symmetry, and level of cooperation.

1.      Cooperative And Non-Cooperative Games

In Cooperative Games, players come to strategic decisions through agreements and negotiations. On the contrary, in Non-cooperative Games, the participants decide their own strategy in order to maximize their outcomes.

2.      Normal Form And Extensive Form Games

As the name indicates, Normal Form Games can be described as a matrix where strategies and payoffs are showcased in a tabular form. They are excellent at identifying dominant strategies and optimal results. On the other hand, Extensive Form Games are ones where the description of the game is developed in the form of a decision tree. It represents events according to the occurrence of chance where players are shown on different nodes.

3.      Simultaneous Move Games And Sequential Move Games

In Simultaneous Games, two or more players adopt a similar strategy at the same time. However, none of them have knowledge of the other party's decisions or moves. Whereas in Sequential Games, players have knowledge about the moves of other players who have already adopted a strategy.

4.      Constant Sum, Zero Sum, And Non-Zero Sum Games

In a Constant Sum Game, the sum of consequences of all the players remains constant even if the outcomes are not the same. A zero Sum Game is a subtype of Constant Sum Game where the sum of outcomes of all players is always zero. Non-zero Sum Games are games where the sum of the outcomes of all the players is not zero.

A board game being played with a dice
The application of game theory isn't limited to psychology, but economists can also leverage it concepts to understand economic and management processes. (Source: Pixabay)

What Is Behavioral Economics And Game Theory?

On the contrary, behavioral game theory extends the analytical game theories and considers players' behaviors and emotions when competing. It studies the feeling of players during payoffs, limitations in strategic thinking, influential element, and effects of learning.

Behavioral game theory combines empirical and theoretical evidence to develop strategic behaviors further evaluated by political, social, and economic interactions.

Wondering what is game theory in economics or the role of game theory in economics? The game theory actually studies the methods through which interacting picks of economic agents can produce outcomes with respect to personal preferences.

To explain this in simpler terms, game theory from a behavioral economics perspective can be described as a branch of applied mathematics that offers a theoretical framework for analyzing social situations where players make optimal decisions.

Superprof is a leading online education platform teaching over a hundred courses remotely. Whether you live in Minneapolis, New York, or any other state of the US, you can enroll in an online game theory course and harness the power of game theory and behavioral economics to open new growth possibilities.

Why Choose Game Theory In Behavioral Economics?

The manner we use to frame our issues and challenges determines our end decisions. Behavioral economics and game theory helps you understand the psychological perspective behind economic behavior by exploring behavior's social and strategic considerations.

Learning game theory or earning certification in this discipline of behavioral economics opens up career possibilities.

With a certification in game theory and knowledge of its practical application, you can land successful and lucrative jobs such as researchers or policymakers in government agencies in economic forecasting, statistics, economic affairs, and finance sectors. You can also join national ministries and become bureaus for policy analysis.

It predicts how individuals will behave in a particular circumstance by analyzing multiple psychological and social aspects. The experimental findings of a game theory can be divided into three categories: reciprocated social values, framing, and pregame theory.

Why Should One Study Behavioral Economics And Game Theory?

S.NoWhy Study Behavioral Economics And Game Theory
1.It identifies the hidden motives and mechanisms behind the behavior
2.Opening up of career prospects
3.Better understanding and improved strategic decision making
4.Developing excellent analytical and leadership abilities
5.Application of game theory and behavioral economics to simplify complex real-life problems
6.Development of strategic reasoning and competitive behavior

Want To Learn Behavioral Economics And Game Theory With Superprof

Today, the world has shrined into an interconnected space. It has become essential to understand the theoretical and practical application of game theory from a behavioral economics perspective as it develops strategic reasoning and competitive behavior. Studying game theory in economics is the key to strategic success in the business and economic landscape.

A widely sought-after method to learn game theory is enrolling with online learning centers. However, in order to enhance your understanding, it's better to choose one-to-one sessions. The reason is that in communal settings like classrooms, students don't receive personalized attention, which impacts their understanding and knowledge of the subject matter. Hence, it's important to hire expert economic tutors from Superprof who can provide customized sessions for teaching game theory.

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Aimen

Aimen has five years of experience working in the digital marketing industry paired with her diverse background in fields such as computer sciences, building and construction, international affairs, medicine and finance. As a marketer, she helps businesses of all sizes achieve their goals through increased brand visibility, enhanced lead generation, and proper nurturing of potential leads.