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Wednesday, May 04, 2011

What use is game theory?

Fantastic interview with game theorist Ariel Rubinstein on Econtalk. I agree with Rubinstein that game theory has little predictive power in the real world, despite the pretty mathematics. Experiments at RAND (see, e.g., Mirowski's Machine Dreams) showed early game theorists, including Nash, that people don't conform to the idealizations in their models. But this wasn't emphasized (Mirowski would claim it was deliberately hushed up) until more and more experiments showed similar results. (Who woulda thought -- people are "irrational"! :-)

Perhaps the most useful thing about game theory is that it requires you to think carefully about decision problems. The discipline of this kind of analysis is valuable, even if the models have limited applicability to real situations.

Rubinstein discusses a number of topics, including raw intelligence vs psychological insight and its importance in economics (see also here). He has, in my opinion, a very developed and mature view of what social scientists actually do, as opposed to what they claim to do.

Rubinstein reminds me strongly (in intellectual style, manner of speaking) of other great Israeli academics I have known. Such people are a treasure.

Ariel Rubinstein of Tel Aviv University and New York University talks with EconTalk host Russ Roberts about the state of game theory and behavioral economics, two of the most influential areas of economics in recent years. Drawing on his Afterword for the 60th anniversary edition of Von Neumann and Morgenstern's Theory of Games and Economic Behavior, Rubinstein argues that game theory's successes have been quite limited. Rubinstein, himself a game theorist, argues that game theory is unable to yield testable predictions or solutions to public policy problems. He argues that game theorists have a natural incentive to exaggerate its usefulness. In the area of behavioral economics, Rubinstein argues that the experimental results (which often draw on game theory) are too often done in ways that are not rigorous. The conversation concludes with a plea for honesty about what economics can and cannot do.

Here is Rubinstein's Afterward to the 60th anniversary edition of Theory of Games. It is only a few pages and definitely worth reading if you have any interest in game theory, or if you are pressed for time and can't listen to the podcast. See p. 634:

So is game theory useful in any way? The popular literature is full of nonsensical claims to that effect [Remember the FCC bandwidth auctions?] ... Most situations can be analyzed in a number of ways, which usually yield contradictory "predictions" ...

See also Venn diagram for economics :-)

Note Added: Ariel Rubinstein found this post and sent me a nice email with a link to this photo album of cafes around the world where he likes to work. Below is one of the places I've actually been to (Brewed Awakening in Berkeley). I guess academics should not complain about our lot in life :-)

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