Is game theory a dead end?

by on October 12, 2005 at 7:39 am in Economics | Permalink

Writing about the new Nobel Prizes, Michael Mandel argues:

Game theory is no doubt wonderful for telling stories. However, it flunks the main test of any scientific theory: The ability to make empirically testable predictions. In most real-life situations, many different outcomes — from full cooperation to near-disastrous conflict — are consistent with the game-theory version of rationality.

To put it a different way: If the world had been blown up during the Cuban Missile Crisis of 1962, game theorists could have explained that as an unfortunate outcome — but one that was just as rational as what actually happened. Similarly, an industry that collapses into run-amok competition, like the airlines, can be explained rationally by game theorists as easily as one where cooperation is the norm.

I can think of possible responses:

1. Behavioral approaches will flesh out how humans actually behave.  Game theory will end up with clear predictions, just give it time.

2. Computational approaches will flesh out how humans actually behave.  Game theory will end up with clear predictions, just give it time.

3. Evolutionary approaches will flesh out how humans actually behave.  Game theory will end up with clear predictions, just give it time.

4. Experimental approaches will flesh out how humans actually behave.  Game theory will end up with clear predictions, just give it time.

5. The real world is in fact indeterminate or close to indeterminate.  The indeterminacy and multiple equilibria of game theory are not a problem, but rather reflect how closely the theory mirrors reality.  Yes you might prefer sharp, clear predictions, but tough tiddlywinks, you’re not going to get them.  Faithfulness to reality is more important than fulfilling abstract methodological strictures.

Any one of these answers would suffice and allow us to push full steam ahead, or in the case of #5 declare victory and go home.  The problem is that we don’t know which one is true. 

The bottom line: Like so much of economics, the strongest argument for game theory is simply to chat with someone who doesn’t know any.

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