Game theory is an economic concept that encompasses elements from actual games as factors for real-life consumer behaviors and decisions. Beyond economics, game theory can be applied to other professional endeavors in business and policy-making. You could even use some of the principles at home! Find out more about game theory in this article.
What Exactly Is Game Theory?
Game theory is a branch of behavioral economics that uses a theoretical framework to analyze different situations and their outcomes. This venture uses different tools to understand how and why people make their decisions.
The concept of game theory was developed by John Von Neumann, an American mathematician, and his Princeton University colleague Oskar Morgenstern. They coined this idea in 1994 to solve problems in economics.
I can observe the game theory is applied very much in economics. Generally, it would be wise to get into the mathematics as much as seems reasonable because the economists who use more mathematics are somehow more respected than those who use less. That's the trend.
John Forbes Nash, Jr., American mathematician
There are several players and participants present in a game theory circumstance. A player's fate depends on the course of action taken by another player. This concept is applied in business to assess possible outcomes so leaders can make informed decisions. The use of game theory in economics is increasing due to various reasons, such as;
- It enlightens about foreseeable outcomes from particular situations
- Business workers can prepare for future operations
- It involves strategic analyzes to beware of possible risks and threats to the company
- It improves decision-making skills
- It helps in creating constructive business strategies
Different types of game theories are used in businesses, including;
- The Prisoner's dilemma
- The centipede game
- Dictator game
- Volunteer's dilemma
- Game for 100 points
- Auction game
What Are the Characteristics of Game Theory?
Game theory is a technical concept with various essential characteristics. Thus, it is important to thoroughly understand these characteristics in order to grasp the concept of game theory in economics.
Here are the main characteristics of game theory you must know.
1. Competitiveness
Any game or scenario which has the following four properties is considered to be competitive;
- The number of competitors is limited. (n ≥ 2). If there are two people, then n = 2; however, if there are less than two people, it is known as an n-person game
- Every participant has a set number of foreseeable outcomes
- No player can know the other player's decision before making their decision, which will impact the outcome of all the players
- Every player can get a gain payment in every turn after the combination of activities is done. However, if a player acts up in any turn, there will be a deduction from the sum, which can affect all the participants
Economics studies situations relying on more than one person in the "game," since the point is to study the factors, outcomes, and relationships in the economy, which encompasses millions of people!
2. Strategy
The way one plays the game is the strategy. Some games have one available strategy, while others may have multiple (hundreds, thousands, or even infinite) available strategies. It depends on the setup of the game and the way a player can interact with it.
A player can pick different strategies such as;
Pure Strategy
Players take an objective step to maximize profits if they know what action will the other player take. Typically, the player will make predictable decisions, maybe even the same choices each time. They may not even have another choice available.
Mixed Strategy
Players take a step by making a probable guess of the other player's course of action. Therefore, a mixed strategy is a choice of pure and fixed probabilities. There may be infinite choices available to the players, with each player’s choice changing the landscape for the next player in line.
Repeated Game Strategy
Players use their previous decisions in games to take steps in the present and future scenarios. Players can gain experience from past observation and participation, which informs their choices moving forward. They may learn from past successes and failures to try to secure a better outcome in the next game.
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3. Number of People
This is when the concept of two-person, zero-sum steps in. Suppose there are only two players in a game. The total sum of the profit will be zero if the losses of one player are equal to the gains of the other.
4. Payoff
The payoff in a game theory is the profit or satisfaction each player gets by the end of the day. Each player has some number of possible actions to take which may or may not affect the possible actions and outcomes for the other players. Often, the possibilities are measured in a Payoff Matrix, which is used to determine the possible payoff outcomes for each player.
5. Value of Game
Signified as 'V,' this is what player A gets when both the players use their best strategies in the game.
The application of game theory in economics enlightens us that every player acts selfishly to reap maximum profits by the end. However, little do they know that their fate depends on other players' decisions. Therefore, players should have a rational and selfless approach to generate maximum profits, which they can divide by the end of the game.
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Is It Hard to Learn Game Theory?
The extensive gains from the application of game theory in economics lure many business leaders to learn this subject. However, before starting, you may wonder how hard it is to learn game theory. Game theory is a highly challenging subject as it comprises complex math. Moreover, it requires forming strategic analysis only based on probabilities and no certainties.
Nevertheless, this does not mean you should give up on this subject without even giving it a shot. With Superprof's professional economic tutors, you can learn this interesting subject from the comfort of your home.
We offer combined effective ways to learn game theory. Let's look at some of them;
1. Get Exceptional Command in Math
Game theory is an important branch of mathematics that includes practical interactions among rational agents. This concept involves the use of complex math. As a result, it is necessary to have a firm grip on mathematics if you wish to excel in game theory.
The key to learning math is to wrap your head around concepts. This is followed by consistent practice. Moreover, it would be best if you tried implementing math in real-life problems and situations as it provides practical knowledge and exposure.
2. Work on Your Analytical Skills
The best way to excel in game theory in economics is by enhancing your analytical skills, as it is a crucial feature of the subject. You should be able to assess and understand different probabilities. This will aid you in weighing which course of action will bring a favorable result for you.
You can polish your analytical skills by observing and understanding what is happening around you. Only acquiring solutions and moving forward does not suffice. Game theory requires you to use your analytical skills to apprehend what will result from any decision you make. This practice will ensure you make informed decisions that will benefit your business.
3. Broaden Your Perspective
It is indispensable to broaden your perspective to apply game theory successfully. It would be best if you thought outside the box to be able to assess what will be the decision of the other player. This is necessary to make an informed decision objectively.
4. Hire a Professional Private Tutor
The best way to learn game theory courses is to hire a private tutor. This complex subject calls for individual attention and concentration. Hiring a private tutor will ensure that you are provided undivided attention and focus from an experienced tutor, unlike in a classroom setting.
Studying with a private tutor offers convenience, flexibility, affordability, and more. Moreover, the groundbreaking innovation of online education has made it easier to acquire private tutoring assistance from anywhere in the world at any time. You can access the world's best online tutor at your home with just a few clicks.
Learning with a private tutor is a great way to ensure you (or your child) can learn everything required. With a private tutor, you can be sure to get individualized attention and lesson plans to suit your strengths, weaknesses, and learning styles.
By taking online tutoring courses, you can easily learn from any tutor anywhere from the comfort of your home, removing the need to commute or host a guest at home.
Want to Learn Game Theory with Superprof?
There are many types of game theory, so it is a highly complex subject that can be difficult to learn. To remedy the situation, learning with a professional private tutor on Superprof can be the perfect solution!
Superprof has economics tutors with affordable rates and verified reviews. Our students vouch for our competency. You can invest your time and trust in us without hesitation, as we prioritize effective learning above everything else.
Economics and game theory are vast subjects. Game theory in relation to economics includes concepts like cooperative & non-cooperative games, symmetric & asymmetric games, and zero-sum & non-zero-sum games. Learn about all these concepts and more with a tutor!
Many of our private tutors are practicing economists with a solid command of game theory and other analysis techniques. They ensure to offer you world-class educational services while considering your convenience and availability.
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