How do you use game theory to improve your decision making and problem solving skills?
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Game theory is the science of rational decision making in interactive situations, where the outcome depends not only on your own actions, but also on the actions of others. Game theory models these situations as games, where players have preferences over the possible outcomes, and strategies to achieve them. A game can be represented by a matrix, a tree, or a graph, depending on its structure and information. The goal of game theory is to find the equilibrium, or the optimal combination of strategies for all players, given their preferences and expectations.
To use game theory to improve your decision making and problem solving skills, you need to be able to identify when you are facing a game, and what kind of game it is. A game has four elements: players, actions, payoffs, and information. Players are the agents who make choices in the game. Actions are the possible moves or decisions that each player can make. Payoffs are the outcomes or rewards that each player receives from the game, depending on the actions of all players. Information is the knowledge that each player has about the game, such as the rules, the payoffs, and the actions of others.
To analyze a game, you need to use some tools and concepts of game theory, such as dominance, Nash equilibrium, backward induction, and subgame perfection. Dominance is a criterion that helps you eliminate strategies that are never better than another strategy, regardless of what others do. Nash equilibrium is a concept that identifies the strategies that are best responses to each other, meaning that no player can gain by deviating from his or her strategy, given what others do. Backward induction is a method that helps you find the optimal strategy by starting from the end of the game, and working backwards. Subgame perfection is a refinement of Nash equilibrium that requires that the strategies are optimal in every subgame, or smaller game within the game.
To apply game theory to your decision making and problem solving skills, you need to be able to model the situation as a game, and use the appropriate tools and concepts to find the equilibrium. For example, you can use game theory to negotiate a contract, to bid in an auction, to compete in a market , to cooperate in a team , to resolve a conflict, or to design a mechanism. By using game theory, you can anticipate the behavior of others, and choose the best strategy for yourself, given your goals and constraints.
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It is important to remember that in order to solve any game theoretic model, strong assumptions must be made. These include 1) what actions are permissible in the game and the form that the game takes, 2) what information each player has and how they use it to make decisions, and 3) how each player values payoffs in the game. In practice, this may make literally solving games to apply to the real world quite difficult, and maybe even misleading. However, the core results from the canonical games, such as the Rubinstein alternating offer game, can provide useful insights in the appropriate situations. To use the example from Rubinstein, in a negotiation, the relative patience/myopia of each negotiator greatly influences the final payoffs.
To improve your game theory skills, you need to practice and learn from different examples and applications of game theory. You can read books, articles, and blogs on game theory, or take online courses and quizzes. You can also play games, such as chess, poker, or rock-paper-scissors, and analyze them using game theory. You can also observe real-life situations, such as politics, sports, or business, and try to model them as games, and find the equilibrium. By doing so, you will develop your intuition and logic, and sharpen your decision making and problem solving skills.
Game theory is a powerful and useful tool, but it also has some limitations and assumptions that you need to be aware of. Game theory assumes that players are rational, meaning that they act in their own self-interest, and have consistent and complete preferences. Game theory also assumes that players have common knowledge, meaning that they know everything that is relevant to the game, and know that others know it too. However, in reality, these assumptions may not always hold, and players may behave irrationally, inconsistently, or incompletely. Moreover, game theory may not capture all the aspects of human behavior, such as emotions, ethics, or social norms. Therefore, you need to use game theory with caution, and supplement it with other perspectives and insights.
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Wherever possible (and really it should always be possible): be open and honest and expect / assume the same from others. From the start consider how you would like to be treated and act the same to others. Be consistent. If you consistently "lose" by acting with integrity then leave the game. Above all, try to avoid playing games in the first place.
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Game theory provides excellent Analytical training for students. Remember that in business u never have the data that you invented in academia. Therefore, I think that advanced game theory Should be taught in the math Department along with other quant approaches such as linear prpgramming
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