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October 12, 2005
Nobel post-announcement analysis
Start with Michael Mandel at BusinessWeek.
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.
Tyler Cowen at Marginal Revolution replies:
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.
Mandel, now posting from his blog, returns the volley,
I completely agree with Tyler's #5, about the essential indeterminacy of the real world, but I don't agree that game theory helps us think about it in the right way. The set of possible equilibria of a repeated game is far too broad to be useful. We can get good equilibria, bad equilibria, and everything in between.
Behavioral economics embodies uncertainty as well, since the reference level or status quo can be hard to determine. But in the end I feel more comfortable that I've learned something general about the way that people behave from behavioral economics (i.e. the principle of loss aversion) than from game theory.
There's also a broader question: What do we expect from economics-accurate predictions, falsifiability, or what? I sometimes get the feeling that economists are applying too low a standard.
Enter Russell Roberts (Cafe Hayek)
Here's one I'd suggest:
6. Game theory generates no predictions about the real world but it is a useful way of organizing your thinking about various real-world phenomena. It's a language that helps avoid mistakes or confusion.
That having been said, I think the kind of phenomena that game theory helps with are more limited than most of the profession seems to think. Competition reduces the role and importance of strategic behavior and makes game theory less useful.
Lynne Kiesling (Knowledge Problem) joins the fray,
But I do have a snarky follow-up question for Tyler: to what extent do you think that our colleagues are interested in understanding human action? What about the extent to which we economists are enamored with our tools, and engage in "math for math's sake" work? Just asking ...
For good measure, let's also include Daniel Drezner, who takes issue with a piece in Slate. Drezner says:
Kaplan's essay contains a grain of truth about the dangers of social science. Too often, theorists come up with great models of the world by assuming away petty inconveniences like bureaucratic politics, implementation with incomplete information, or the effects of rhetorical blowback. But before he throws out the baby with the bathwater, Kaplan might want to ask himself the following question: if policymakers choose not to rely on social science theories to wend their way through a complex world, what navigational aid would Kaplan suggest in its stead? Policymakers across the political spectrum always like to poke fun at explicit theorizing about international relations. The problem is that they usually rely on historical analogies instead -- which are, in every way, worse than the use of explicit theories.
Game theory, like any model building apparatus, is a way of keeping track of what's going on so that you don't contradict yourself. I certainly understand the frustration of Mandel and others over the non-falsifiability of models with multiple equilibria. (See also the story Roberts relates in his post.) However, I think a number of important real-world situations may be characterized by coordination failures and multiple equilibria. It is worth having a framework that can accommodate that, as long as you don't start seeing multiple equilibria behind every tree. It's not a theory of everything... at least not yet, and it may never be. It's one more tool in the toolbox, useful for identifying the effect of changes in the rules or institutions and making sure you don't violate your own assumptions.
Posted by William Polley at October 12, 2005 5:13 PM
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