Game theory and cognitive psychology

http://www.sciencedaily.com/releases/2009/02/090215151809.htm

I really like the approach to game theory and cognitive psychology. They talk about how game theory while a good theory doesn’t really work in the real world. This disconnect is due to the fact that people don’t think ahead about what all the possible outcomes of a choice are. The outcome in real life don’t match with what the game might tell us. The ability to think strategically about a situation is called their strategic IQ and the only way to achieve this is to play the same game repetitively or to get training in how to play the game. Most people make their choice assuming what everyone else is doing is random or sometime take the second step and think that others believe their actions to be random. Essentially game theory has little real world application because people don’t think in the way that game theory predicts.

When using game theory to predict how people will interact in auctions and networks it is going to be important to remember that the answers and predictions we come up with can’t be taken as the absolute truth. People often act on impulse with no strategic thought at all. Game theory is still a reliable tool when solving for the best strategy and generally working with strategy. It should only be used however as a guide not an answer generating tool.