12 October 2005

Game Theory and the Oft-Misunderstood Science


I am pleased that two economists specializing in game theory (Professors Thomas Schelling and Robert Auman) have won the 2005 Nobel Prize for Economics. Game theory is a branch of economics, and increasingly a branch of mathematical political science, that analyzes the behavior of rational actors under a given scenario. It is not only significant among academics but can and ought to be used by all managers who make decisions. Game theory is the most powerful tool we have to predict behavior in humans, animals and even microscopic life such as viruses and bacteria.

Professor Schelling was asked in an interview what his research in game theory has to do with economics. The lay public has a very narrow understanding of economics. Most people mistake financial economics, that is the science of interest rates, monetary policy, yield curves, etc., for the entirety of the dismal science. Financial economics is only one small branch of economics.

At its core, economic science is about social behavior and interaction. In this regard, it is akin to the fields of sociology and psychology. Where sociologists and psychologists explain social interaction from the perspectives of organization and culture, economists approach social behavior from the viewpoints of rationality, strategy and available information, thus the significance of game theory.

It is inappropriate that in all high schools and most universities Econ 101 starts with the demand and supply curves. Econ 101 should be devoted to the fundamental philosophy behind economics: It is the study of behavior.

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