Thursday, 20 August 2009

Game theory has a host of practical applications

Or so says Robert Aumann ... and he should know, Aumann shared the 2005 Nobel prize for economics for his contributions to the field of game theory. Aumann has been in South Africa lecturing about game theory as the foundation of market design. The general area of market design is more often referred to as mechanism design or implementation theory. Aumann points out that using mechanism design is not new,
[...] the first written account of a game theoretic solution is in the Bible, when King Solomon faced two women, both claiming a baby as their own. Solomon decreed that the baby be cut in half, but as soon as he offered his verdict one of the women renounced her claim. Solomon promptly awarded her the baby, realising that only the true mother would value the child’s life enough to give it away.
But an important point to come from Aumman's lecture was,
Aumann thinks moving from game theory to game engineering will help us. Theory can be used to design practical interactive systems — the US auctions being a good example.
But Aumann cautions,
[...] governments in particular must understand the power of incentives to drive economic and political actors, and work towards creating systems that get the best from them. All too often, governments want to play the game instead of acting as referee, and find themselves subject to unexpected incentives they cannot control.
A very important point: referees should not be players, because when they are the refereeing decisions tend to favour one, obvious, team. But somehow governments all to often forgets this basic point.

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