Game Theory
Recall that with the Nash equilibrium, participants make decisions based on the behavior of others around them. This is an example of a branch of mathematics known as game theory, which economists use to understand how individual firms make decisions. In particular, the techniques of game theory can help us determine what level of cooperation is most likely.
How to Think Strategically About Your Actions
REAL WORLD EXAMPLES
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Which Briefcase Would You Choose?
The television game show, Let’s Make a Deal, provides a famous example of the difficulties in assessing probabilities accurately.
At the end of the show, the host, Monty Hall, asks a contestant to open one of three curtains. Behind one curtain is a car; behind another is a much lesser—but still nice—prize, and the third curtain has a “joke” prize.
Gambling It Away
Playing the lottery, and other games of chance, are generally a losing proposition. There are exceptions to this basic rule, like the card game Blackjack featured in the movie, 21, a fact-based story about six MIT students who were trained to become experts in card counting and earned millions is Las Vegas casinos before they were caught.
However, that story is unusual. The house stacks the deck against gamblers and many governments create games of chance with payoffs in their favor. Why would any rational person play with the odds stacked against them?
