Game Theory in Economics Assignments: Strategy and Decision-Making

February 5, 2024 11:04 PM

The study of strategic decision-making, or game theory, combines several aspects of philosophy, psychology, and mathematics. After Neumann and Oskar Morgenstern’s 1944 study, it has advanced significantly. The fact that up to 12 eminent scientists and economists have received the Nobel Prize in Economic Sciences for their contributions to game theory since 1970 indicates how important it is to contemporary analysis and decision-making.

Understanding this theory and its correlated information is super essential, especially when you are solving economics questions and assignments. As per the experts at MyAssignmenthelp.com, who provide affordable and free assignment help, updated knowledge of gaming theory can make modern economics a lot easier to grasp and apply. In this blog, you will get a brief idea of the same. Read the blog to the end, and it will become easier to understand.

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However, if you are still not confident about the application of the theory, try taking the help of MyAssignmenthelp.com or read their education blog. See what the long-time practicing professors have to say about these.

Let’s get started with understanding game theory!

A Detailed Idea on Game Theory

One can’t help but wonder if there is a better way to maximize outcomes when making decisions. Game theory can help with that. A mathematical framework for examining strategic decision-making is game theory. It is applied in a number of disciplines, including computer science, psychology, political science, and economics. With game theory, one can model how individuals or groups interact in strategic situations where the decisions made by each actor have an impact on the decisions made by others. Stated differently, it enables us to investigate how individuals or groups act when their choices have an impact on others and vice versa.

The foundation of game theory is the notion that people make logical decisions. When people behave rationally, they have well-defined preferences and, based on their perceptions of the other players’ decisions, select the option that maximizes their expected utility. Rationality, however, does not imply that people are always right or that they have complete knowledge of the circumstances. It simply means that, given what they know, they behave in their own self-interest.

Although it has its limitations, game theory is a helpful tool for understanding and forecasting behavior. The fact that it is assumed that players are fully informed about both the game they are playing and the strategies of their opponents presents one of the main challenges. In actuality, people frequently possess inaccurate or partial information, which can result in less-than-ideal results. Furthermore, the results of game theory models may not be as applicable in real-world scenarios because they are frequently simplified versions of complex real-world scenarios.

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Game theory is a field that studies the interaction among multiple decision-makers or players in a strategic setting. It covers a broad range of games, including the prisoner’s dilemma, ultimatum game, battle of the sexes, chicken game, and many others. These games involve players making choices that affect not only their own outcome but also that of the other players.

In game theory, there are three categories of strategies: dominant, Nash, and mixed.

  • A dominant strategy is the best course of action for a player, regardless of what the other player does. It ensures that the player’s outcome is always better than any other possible outcome, regardless of what the other player chooses. 
  • Nash equilibrium is a set of strategies where no player can unilaterally change their strategy and improve their outcome. In other words, each player’s strategy is the best response to the other player’s strategy. This creates a stable situation where neither player has an incentive to change their strategy.
  • A mixed strategy involves combining pure strategies with the element of randomization. This makes it more difficult for the other player to predict the player’s next move. A mixed strategy can be useful when there is no dominant strategy or when there is no Nash equilibrium.

Overall, game theory provides a framework for understanding how players make decisions in strategic situations and helps analyze the outcomes of different strategies.

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Real-world applications of game theory abound. Among other things, it can be used to examine voting patterns in politics, bargaining tactics in negotiations, dispute resolution in international relations, and pricing strategies in markets. In repeated games, for instance, it has been demonstrated that the tit-for-tat strategy—in which a player reacts to the other player’s action from the previous round—is a useful tool for fostering cooperation. Another illustration is the allocation of resources through auctions, which, when done correctly, can produce effective results.

All things considered, game theory is an effective method for examining strategic decision-making. We can forecast and explain behavior in a variety of scenarios by comprehending the incentives and constraints of various players. To get a more accurate picture of reality, it’s crucial to understand game theory’s limitations and combine it with other techniques.

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