Dear Kejetil,

Game Theory has given some interesting insights into to problems of micro and macroeconomics that cannot be solved by traditional economic methods. If we are disappointed with its solution, it is because it does not look like traditional economic solution, like MR = MC in microeconomics. Game theory did not deliver such unique solution we are looking for in traditional oligopolistic situations with rivalrous behavior.

Maybe the science of Game Theory is still budding, having started on a firm basis of the mini-max theory only in the 1930s. But it is sad to see that we have squandered the whole traditional approach in Industrial Organization, for instance, for the Game Theory approach while it is still evolving. This is not to ignore that as a scientific method, Game Theory has brought its own novelty to economics. I have in mind here the advances that were made by John Nash and Robert Aumann particularly in collusive solution, and strategic modelling with and without probability. So, it seems that Game Theory is still a promising method to solve economic problems.

Then came experimental economics, which contradicts some results of game theory. What could happen now for the Nobel prize.

Dear Kejetil,

Game Theory has given some interesting insights into to problems of micro and macroeconomics that cannot be solved by traditional economic methods. If we are disappointed with its solution, it is because it does not look like traditional economic solution, like MR = MC in microeconomics. Game theory did not deliver such unique solution we are looking for in traditional oligopolistic situations with rivalrous behavior.

Maybe the science of Game Theory is still budding, having started on a firm basis of the mini-max theory only in the 1930s. But it is sad to see that we have squandered the whole traditional approach in Industrial Organization, for instance, for the Game Theory approach while it is still evolving. This is not to ignore that as a scientific method, Game Theory has brought its own novelty to economics. I have in mind here the advances that were made by John Nash and Robert Aumann particularly in collusive solution, and strategic modelling with and without probability. So, it seems that Game Theory is still a promising method to solve economic problems.

Game theory allows for the formalization of a lot of economic ideas that was once relegated to "worldly" philosophy or moral philosophy. The interesting and stimulating aspects of game theory for me is its connection to the development of computer science with one of its key early proponents, von Neumann, and his ideas having profound impact on the theory of computation as well. So the popularity of game theory seems to have grown in tandem with advances in the theory of computation. Not surprising since game heory and the theory of computation where fruitions from the same rich fountain of ideas that took shape during circa WWII, the years thereafter

So much so that anything amendable to computation becomes a ripe candidate for investigations in game theory and vice versa. I like to think of the archetypical games in game theory as a sort of thought experiments in economics, though at times expressed in mathematical language, or embedded in metaphor, yet may still be investigated through the use of computers. As is the case with an algorithmic, rule-based approach to human interactions (feature detection).

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Shian-Loong Bernard Lew: very interesting viewpoints. Surely computer science is a part of the story. I agree especially on your statement "a sort of thought experiment in economics". I believe Ariel Rubinstein has both written and spoken a lot on both game and economic theory along those lines. A good example is of course his book 'Economic Fables' - really worth a read by the way.

Game theory is the study of mathematical models of conflict and cooperation between intelligent rational decision-makers. It is used a lot in economics today, but also in psychology, biology, politics, computer science. The development of this science started from the book of von Neumann (1944). Initial interest was on zero sum games, but now economics went beyond this assumption.

I think that game theory in economics is more inside microeconomics. Contrary to general equilibrium (perfect competition), it studies imperfect competition, or oligopoly. There are many applications in industrial organization. Many of economic experiments are related to games. However, it is not so obvious if real agents behave as ideal homo economicus. For example, experiments done by a group of scientists from Santa Fe Institute (NM, USA) have shown that in ultimatum game (rational solution is to accept offer if your partner offers you even $0.01 from $100 jointly found) is played differently among many cultures (typically people reject an offer less than 1/3 of pie as dishonest). This shows that there are still many psychological issues to think about in economic theory. See article here: https://www.umass.edu/preferen/gintis/Anthro%20AER%202001.pdf

There are one shot, many period and even dynamic games in continuous time. Hotelling started to develop games in space (2 sellers of ice cream on a beach). John Nash suggested new concept of equilibrium later that bears his name and is widely used in economics.

It is not obvious if players understand game correctly and have full and symmetric information about it. Departure from this gives rise to new equilibria. There are also evolutionary games with bounded rational agents, who think just 1 or few steps (not infinite). But even real game (chess) is played in such a way, due to high complexity (even computer cannot solve it to the end). When there is some uncertainty (like in playing cards), strategy also becomes different. This shows that many models are needed for real games that we play, and that is why game theory in economics develops extensively.

There is also one aspect that is not yet investigated by economic game theory: it is altruistic component in behavior. It can lead to real cooperation and change  a lot in the structure of game outcomes. Egoists playing games often come to non-Pareto optimal outcome.

Game Theory could certainly better explain many situations of conflict or cooperation than traditional economic theory. By the 60's Allais and Ellsberg pointed out some paradoxes even for Game Theory.  The root of Game Theory's problem appear to be in the fact that to solve any dynamic game (with or without complete information) the traditional technique requires to assume "perfect knowledge", it means "I know that you know that I know that you know that..." (to infinite) what is certainly impossible since humans have limited capability of iteration (e.g. Camerer and Ho have shown that most university students iterate twice, it means I know that you know what I know), I suspect most people iterate even less (zero or "I do my things and I don't care about the others" or one "I do my things regarding that others do their things also")

That is why, among other things, some experiments contradict formal game theory, the other strong element that challenges formal game theory is the psychological part of us, envy, altruism, reciprocity, etc. These are precisely, in my opinion, the two main branches of research in what is called right know "Behavioral Game Theory" or Game Theory with valuable elements of Psychology (emotions) and Neuro Science (human capacity of thinking).

Some authors like Rabin, Cox, Fehr, Schmidt, etc. emphasize the psychological elements in more detailed decision theory models and others like Camerer emphasize in mind iterations (our capacity to get close to perrfect knowledge).

Hope it helps.

Best,