http://lawrules.files.wordpress.com/2011/08/

Economist calls it game theory but the psychologists call it the theory of social situations. This is because most research in game theory focuses on how groups of people interact. In this report we will discuss about noncooperative game theory which deals with how intelligent individuals interact with one another to achieve their goals. Nash, the real life man behind Russell Crowe’s character in ‘A Beautiful Mind’ provided the math which made it work and won a Nobel prize for it.

The other interesting branches that are closely connected to game theory are decision theory, general equilibrium theory and mechanism design theory.

Decision theory widely used in the decision analysis to maximize expected value. For the economist, this value often depends on money income. Bayes law and Probability theory is heavily used represent the uncertainty outcomes.

General Equilibrium theory usually used in areas like: analysis of economic policies such as tax policy, finance to analyze stock markets, interest and exchange rates and other prices analysis.

Mechanism design theory asks about the consequences of different types of rules. The questions addressed by mechanism design theory include the design of compensation and wage agreements that effectively spread risk while maintaining incentives.

A very famous example of Game Theory is the Prisoner’s Game. Two persons are partners in a crime who have been captured by the police. Each suspect is placed in a separate cell, and offered the opportunity to confess to the crime. This table represented the payoffs:

Not Confess

Confess

Not Confess

5,5

-4,10

Confess

10,-4

1,1

If the two of the suspect not confesses they free (both have 5). If one prisoner confesses and the other does not, the confesses person will testifies against the other in exchange for going free (10), the prisoner who did not confess goes to prison (-4). If both suspect confess they will be given a reduced term of conviction (1).

The decision of confess or not confess can be labeled by “contribute to the common good” or “behave selfishly”. Everyone knows that building the bridge will give benefit to everyone but best for each individual if someone else builds the bridge. In the game that we played in the class room this can be labeled as “lowering the price” or “stay with consensus price”.

Once a doubt enters any one mind, it will rises a fear that take action “hit before hitting first”.

In the corporate world, the business organization that having this doubt for a consensus will likely to live in a state “war of all against all”.

Hobbes’s proposed solution to this problem: Tyranny. The corporate should ask a more powerful agent (government or business association) to punish any company that breaks any promise. If all people know that the cost of breaking promises exceeds the cost of keeping them they will be forced to obey the rules.

(Small report for Information System Organization – Lesson 04)

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