Oct

22

Game Theory II, from James Sogi

October 22, 2009 |

J SogiBruce Bueno de Mesquita's book Predictioneer's Game was my first comprehensible book on the subject and definitely piqued my interest in game theory. He is a political scientist using quantitative rational choice models. He quantifies in a relative way the actor's bargaining power, motivation, position, and in later models, a stochastic factor. The most important step is to ask the right questions and frame the issue to quantify. Relative values are given to the variables, and they can easily be combined to show, at one level, the likely outcomes. Perhaps not so obviously, one's bargaining power and position, and motivation, when combined,give some relative indication of the likely outcome of that parties negotiation or actions. He has developed a computer model which does the calculations and give predictions. Deconstructing the computer model, which he does not disclose how to do, requires some further background research for which he give some clues in the notes. The model is based on the Nash equilibrium which oversimplified is demonstrated in the tragedy of the commons and the prisoner's dilemma. The basic idea is that people will act in their own self interest resulting in an equilibrium lower than optimal for the actors, but which results when each actors acts with his own self interest foremost.

There are recent algos which model this and which allow one to iteratively compute the game tree likely outcomes and equilibrium at each step between parties. If I'm not mistaken, the basic algos use basic math. For the stochastic element, bootstrapping techniques seem to be used to derive a derived mean. With two or three parties, one can keep these in mind and intuitively figure it, but with multiple parties and multiple issues, the combinations are factorial in number and can't be tracked without computer spreadsheets.

Taking a game theorist's look at the current economic situation, one can see that Geithner's and Bernanke's true self interest is preservation of their public image and place in history as the one's who prevented the depression, rather than the one's who allowed it. With that as their self interest, one can see that they will spend all the money, and more, and keep rates lower long than needed, regardless of the out come down he road. They will both be gone later, so they don't care if the next administration/generation is broke, as long as their reputations in history are good. We saw the same thing with Greenspan. The is the example of self interest acting above the common good. This is one of the structural weaknesses in the current constitutional system, with short tenures.

I see no reason market fluctuations couldn't be framed in the game theory model as well. The market actors can be quantified, as can their motivations. Chair often does this in a qualitative manner, but it could be quantified under game theory in a scientific manner.

The next book on the subject I'm going to read, which appears in the notes, is The Art of Strategy: A Game Theorist's Guide to Success in Business and Life by Avinash K. Dixit and Barry J. Nalebuff.


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