Note: This post represents the synthesis of the thoughts, procedures and experiences of others as represented in the articles read in advance (see previous posts) and the discussion among the students and instructor during the Advanced Analytic Techniques class at Mercyhurst University, in September 2018 regarding Game Theory as an Analytic Method, specifically. This technique was evaluated based on its overall validity, simplicity, flexibility and its ability to effectively use unstructured data.
Game theory is a method for determining optimal strategies for two or more players with numerous available strategies. Typically this “game” is displayed using a matrix of payoffs. The underlying assumption is that players will act in a manner consistent with their own rational self-interest with the default assumption being that each player will choose a optimal strategy of maximizing his/her personal payoff. However, the application of game theory introduces a multitude of variables which will influence how a player goes about selecting their moves such as whether they are aware of the moves of other players, whether the game is sequential or simultaneous, whether the game is cooperative or non-cooperative, and many other potential factors.
- Develops a framework for analyzing decision-making
- Quantitative technique that players can use to arrive at an optimal strategy
- Use to develop and impose desired outcomes
- Assumes rational, intelligent decision makers
- Assumes that players have the knowledge about their own pay-offs and pay-offs of others
- Payoffs can be arbitrary/subject to interpretation
- Gets more complicated the closer it gets to reality
**There is an extensive range of models that fall within the parameters of game theory. Our exercise introduced one of the most basic and classic examples of game theory: The Prisoner’s Dilemma.
- Define layers or decision makers
- Determine list of strategies
- Determine outcomes resulting from each strategy
- Determine payoffs from the outcomes
Application of Technique:
Scenario: This is a game show wherein one player can win money, both players can win money, or neither player can win money. $100,000 is up for grabs. The players can choose to split the money or steal the money. If both players choose to “split”, they both walk away with $50,000, if one player chooses to “steal” and the other chooses to “split”, the player who chose to “steal” walks away with $100,000 and the player who chose to “split” walks away with $0. If both players choose to “steal”, both players walk away with $0.
We split 6 players into 3 teams of 2. Each player had two cups with lids -- One cup with a paper inside that said “Split”, the other cup with a paper inside that said, “steal." Players had to decide, given the situation, whether to “steal” or “split” with the other player. Assuming that players make a decision that results in the best possible outcome for each, they would presumably “steal,” resulting in neither player receiving the money.
In the case of our class, 2 teams successfully “split” and the 3rd team resulted in a “steal”/ “split”
For Further Information: