Introducing Game Theory: A Graphic Guide (Graphic Guides)

by Ivan Pastine

Human behaviour is probably better approximated by bounded rationality. That is, human rationality is limited by the tractability of the decision problem (how easy it is to manage), the cognitive limitations of our minds, the time available in which to make the decision, and how important the decision is to us.

The idea of Nash equilibrium is both simple and powerful: in equilibrium each rational player chooses his or her best response to the choice of the other player. That is, he or she chooses the best action given what the other player is doing.

The game illustrates the difficulty of acting together for common or mutual benefit given that people pursue self-interest.

An outcome is Pareto efficient if there is no other potential outcome where somebody is better off and nobody is worse off.

Since players choose to cooperate, in equilibrium they do not pay the moral cost. There is a Pareto improvement in the outcome of the Roommate Game due to moral values; players’ equilibrium payoffs go up from 10 to 14.

Studying group behaviour presents a challenge for game theory because the group as a whole may seem irrational even when each member of the group is rational.

It shows that, for groups which are not run by a dictator, there will always be the possibility of some situations where group preferences are non-transitive, where we reject a choice that may be better for everybody or where irrelevant options change our choice. These problems are inherent in group decision making.