99.01 [Special Post] Game Theory: An Introduction

Have you watched “The Good, the Bad, and the Ugly”?

Do you remember the final scene?

For those who forgot or even worse haven’t watched the movie, let’s discuss the famous scene (Warning! Spoiler Alert!): Three men in a triangle — each with a gun and there’s a rock at the center of the three. It is up to each man to evaluate his situation. All have excellent shots but the question is who do they shoot?

Blondie has supposedly put a message on a rock that holds the key to everything, but do the other two (Tuco and Angel Eyes) trust Blondie to have actually written the correct answer? As the other two evaluate the situation, they realize they can’t trust Blondie to have written the correct answer on the rock — therefore they can’t shoot Blondie. That means the other two can only shoot each other, but only one will likely hit before the other.

What they don’t know is that Blondie has given one an unloaded gun!!! Blondie can ignore that man. The one Blondie has to worry about that the man with the loaded gun will try to kill the one with the unloaded gun although neither will fire at Blondie. As the camera passes from one face to the other the audience is meant to figure out what each would do.

The guy with the loaded gun shoots at the guy with the unloaded gun — Blondie shoots the guy with the loaded gun. Game over! Blondie has dangled Tuco out as bait while he takes the money.

But what if I tell you that the game has been decided before it starts.

Blondie sets up a situation where each evaluates their possible moves, but in reality, Blondie has already won the game even before it was played.

It is such a brilliant example of people making the best decisions based on the information available to them…

Now, what is game theory and how does it relate to ‘The Good, the Bad and, the Ugly‘?

To put it in one simple and lucid sentence: game theory is the theory of chance.

Every decisions that we take can be represented as a game theoretic problem. Everything from whether to go to college, whether to cross the street, whether to go for an Iron-Maiden concert, whether to pass a bill or even whether to love someone!!! Game Theory in also used to analyze which move to play in chess, poker, whether to hit home run, whether to aim for the right or the left during penalty shoot-out and in so many things. We do these things without even realizing that there is a whole branch of study just to justify our decisions, just to justify to the rest of the world that our decisions are in fact rational and straightway outright.

And the best part is we can trace our decisions with the help of MATHEMATICS!!! Just think about it, whatever we think about doing, whatever we prefer to do over other, whatever we decide can be shown with the help of MATHEMATICS!!! Game Theory is such a powerful tool. Remember one thing, Mathematics is the language of nature, it is the language by which we can prove one of the most daring question in the world, “Why?”.

But don’t be intimidated, it is rather easy than what you guys think.

You just need to be curious to learn Game Theory.

How will you feel if I told you Game Theory can explain the Presidency of a country?

How will you feel if I told you Game Theory can explain why Christiano Ronaldo is in Real Madrid and not anywhere else (even when PSG will be ready to offer him any amount he wants)?

1.02 How do people make choices?

In this post I’ll illustrate how people make choices. So far you know that because of scarcity of resources, people ought to choose among alternatives. But how do they choose? Most importantly how you’ll choose when you’re faced with a choice between your PlayStation and studying economics?

Milton Friedman was right when he claimed, “there’s no such thing as a free-lunch.” When you’re playing with your PlayStation, you’re giving up your time you could have used to study economics. So now you’re trading-off economics for PlayStation. Again, for every hour you play with your PlayStation, you’re giving up an hour you could have spent surfing on the internet, spending time with your friends, sleeping, watching TV, listening to music etc. So next time when you’re sitting idle or sobbing over something you didn’t have; just think about the time you’re wasting from your life that you could have used for something meaningful to do.

Now a deep insight to the consequences that what is happening when you’re choosing one over the other. Let’s get back to the previous example. Studying economics will give you a high grade and in the long run it may increase your money income. But sitting idle or sobbing over something or someone will never give you anything. So when you’re sitting idle or sobbing you’re giving up the opportunity of having a higher money income and thus a higher level of living. So here the opportunity cost of sitting idle or sobbing is a higher standard of living. Rational people decide with reference to the opportunity cost associated.

Next I’ll illustrate how much to choose. For this I’ll give you two important concepts of economics: Marginal Cost & Marginal Benefit. Marginal Benefit is the extra happiness or satisfaction you’ll get from having an extra unit of a good. Marginal Cost is the extra cost  associated when you have an extra  unit of a good. Makes sense? No? An example will make it clear. Let’s just say that you want to have ice-cream scoops for Rs. 20/scoop. After having the first  scoop, you want to have another scoop: here your marginal benefit from having an extra scoop is greater than the marginal cost associated with it. So you’ll have that scoop. After 2 scoops you don’t feel like having an another one but with respect to cost you may or may not have that scoop: here your marginal benefit from having an extra scoop is equivalent to the marginal cost associated with it. Just assume that you have that scoop. Now  you had 3 scoops. After that you’re feeling fully satisfied and strictly don’t feel like having another one. So now, your marginal benefit is lesser than the marginal cost associated and don’t have any other scoop. When people have less of anything the importance of that good is high and he/she will be willing to spend a higher price to get that good but when you have more of anything the importance of that good is low and similarly the willingness to spend for that good is low. Now you see why diamonds are so costly! To put it simply:

• MB > MC : You’ll have that good
• MB = MC : You may or may not have that good
• MB < MC : You will definitely not have that good

Now I’ll show you how one can be influenced while making  decisions. Apply it in your real life and you’ll surely get results . Suppose you didn’t do your home assignment. You went to all of your friends and everyone turned down. No one wanted to write it for you. So what will you do? The assignment is very important. Being a smart person as you are, you just went to someone you know is a music buff and hand her a mixed cd of her favourite band . After that, the chances of her rejecting you with the assignment will be significantly lower than before . This is how you influenced her choices of helping you  with the assignment by giving her an incentive. This is how incentives work. But as you know every rose has its thorns, incentives can also lead to disastrous result. Now that you know, that with the help a mixed cd you can get  your assignments done; you’ll hardly  think of doing future assignments by  yourself. What it will lead you to? No study of the subject that leads to lower grades and even failure in the  exam ! So this idea may be fruitful in the short-run but in long run the result is very much unexpected

In the following post, comes the great debate as why economics is a science subject like physics and biology.

1.01 What is Economics & why one should study economics?

To put it briefly, economics is the study of how people should choose their resources for his own use. So one might think the study as rather boring and latent but the main pickle of the story is yet to be said. Resource available to man is very scarce. Say for example, now you’re reading this blog but instead at the same time you could have spent your time playing Call of Duty on your PS4. But you’ve chose to spend 5 minutes of your precious life reading this blog. Time is the most valuable resource, my friend. So the challenge  is to choose how much time to devote to work, to study, to play or to spend time with your girlfriend . Choices are everywhere. Choices also include how much money to spend  on food, on cloth or on buying tickets to your favourite music concert. We didn’t have realized but we all are inborn economist. We are all faced with  limited resources and we all make choices to give us maximum happiness. Now it wouldn’t be weird if I tell you that the word economics actually came from the greek word Oikonomos which just means “one who manages household”.

Let’s just say that you’ve got Rs. 1500 as your birthday present. Now you can choose to spend it on buying an antique collection of The Beatles or you can spend it with  your girlfriend in a romantic candle-light dinner. You ‘re faced with choice, as your resource, Rs. 1500 is fixed. Let’s just say you choose The Beatles over your opportunity to spend time with hour girlfriend. Now think, first, you’ve been faced with choice for your scarce resource and in response to that, you’ve made a choice to spend it on one over the other. Choices are everywhere and at every time. This example is minuscule in comparison to what economists face while making ‘big’ choices on behalf of an entire nation! Yes, the economists have the power to control the ‘happiness’ of  an entire nation.

In the following posts I’ll discuss how people make decisions and after that I’ll give an insight to the most interesting debate that why economics is a science like physics, biology etc.