How do we negotiate when to sell a stock, whether to rat out a partner in crime, how to play a poker hand, or what to ask for when negotiating a job offer? In each of these situations, the actions of others will greatly affect our outcomes — and yet, we have no idea what they are thinking. These are the kinds of situations that game theory has helped mathematicians and economists parse for decades.
In today’s talk, given at TEDxCalTech, behavioral economist Colin Camerer surveys new research that is taking game theory to the next level — by taking fMRI and EEG scans of people’s brains as they engage in bargaining games. The idea is to see what brain circuitry is used as people make decisions, and to map out what agreement and disagreement look like in the brains of humans … and in chimpanzees, who appear to be better at these negotiations than we are.
While the seeds of game theory were planted as early as Plato, the field gained prominence in the 1940s and 1950s, thanks to the work of John von Neumann (who wrote Theory of Games and Economic Behavior) and John Nash (of A Beautiful Mind fame). Since then, eight game theorists have won the Nobel Prize in Economics. To hear about new neuroscience approaches to this classic area of study, watch Camerer’s talk. And below, read some recent several articles about how game theory can apply to our everyday lives.
- What makes a person decide to donate a kidney? As Stanford economist Alvin Roth has shown, it is largely a question of game theory and market economics. According to the October 2012 Reuters story, “Alvin Roth Transformed Kidney Donation System,” in 2004, Roth created the New England Program for Kidney Exchange, a method that used computers — and an algorithm designed by UCLA mathematician Lloyd Shapley — to pair groups of donors and create the types of kidney donation chains depicted on Grey’s Anatomy. Before this system, says Reuters, there were just 19 kidney transplants from live donors in the United States. In 2011, that number rose to 443. In total, about 2000 people have received kidneys through Roth’s system. And in October of 2012, both Roth and Shapley were awarded the Nobel Prize in Economics for their work in taking “stable allocations” from an abstract concept to a reality.
- Another real-life problem that Roth has tackled: in extremely large school systems, how can students be matched with the right school? In the Forbes magazine story, “What Al Roth Did to Win the Nobel Prize in Economics,” journalist Susan Adams takes a look at how Roth leveraged the tools of game theory to tame the high school matching system in New York City, where 80,000 8th graders must be dispersed to 700 schools every year. She writes, “Before Roth got involved, the matching system was so screwed up that a third of the city’s eighth graders didn’t even participate.”
- In their book, It’s Not You, It’s the Dishes, journalists Paula Szuchman and Jenny Anderson wonder if the daily negotiations of marriage are more like playing a game of poker than most people realize. In the article “Marriage and the Art of Game Theory,” which ran on the Daily Beast in July of 2012, Szuchman writes, “Game theory is the study of how we make decisions in strategic situations. Classic examples: the Cuban missile crisis, soccer penalty kicks, and the first scene of The Dark Knight. When you find yourself debating whether to wait for the bus another minute or give up and walk, you’re facing a game-theory dilemma … To cooperate or not to cooperate? To budge or stand your ground? To say ‘OK, fine’ or ‘not a chance’? These are questions married people find themselves asking with surprising frequency.”
- Could game theory explain why so much head-butting happens in the United States Congress, especially as they approached the fiscal cliff in late 2012? (Watch Adam Davidson’s talk explaining the fiscal cliff.) In The Atlantic op-ed “How Game Theory Explains Washington’s Horrible Gridlock,” Mohamed A. El-Erian applies the principles of game theory to Congress’ negotiation over the budget. He writes, “Here is the typical cycle: Responding to the ‘national call,’ the two parties’ initial narratives trend towards ‘grand bargains’ aimed at removing headwinds to growth, jobs, and prosperity. As differences prevail, this gets replaced by a ‘mini bargain,’ or one that would deliver some progress together with momentum for future success. As this also proves elusive, negotiations get quite acrimonious. If and when an 11th-hour compromise emerges, it lacks both content and momentum: The majority of meaningful decisions are postponed, and both Democrats and Republicans emerge from the experience more bitter — at each other, and also within their respective parties.” (Also see: “Game Theory Expert Analyzes Fiscal Cliff.”)
- Of course, the economic standoff of late 2012 wasn’t fully resolved — it was in large part delayed, leading to the more recent “sequester.” In the article “The Strange Game Theory of the Sequester,” Pacific Standard writer David Dayen wonders if Barack Obama is using game theory tactics in moving forward on sharp budget cuts. He writes, “Making clear the impact of forced austerity may offer the best hope for discrediting and reversing it. When faced with closures of national parks, shutdowns of government offices, delays in needed services like the disposition of federal benefits, and long lines at the airport due to a reduction in TSA personnel and air traffic controllers, the thinking goes, perhaps Congress will get moving on a less painful solution.”