The limits of game theory

22 February, 2016 at 11:45 | Posted in Economics | 4 Comments

If you read Binmore’s Essays on the foundations of game theory (1990)
you will find a section where he says that, unfortunately, we get into a
kind of impasse. We get this infinite regress linked to the common
knowledge problem. For example, I drive frequently from Aix to
Marseille. You have the autoroute and parallel to it is the route
nationale. Say there is, one day, congestion on the autoroute and nobody
on the nationale. I think: “Tomorrow I will take the nationale. But, wait
a minute, these other drivers are intelligent too, so they will take the
nationale tomorrow, I would do better to stay over here. But, wait a
minute, these drivers are pretty intelligent so they can make that step
too…” It is actually not logically possible to reason to the solution of
these kinds of problems that people are supposed to be solving in game

untitledYou can surely define an equilibrium, and say that if we were there
nobody would want to move. But then you get to the problem of how we
get to this equilibrium—the exact same problem that we have with
general equilibrium …

For certain specific, local problems, game theory is a very nice way
of thinking about how people might try to solve them, but as soon as
you are dealing with a general problem like an economy or a market,
I think it is difficult to believe that there is full strategic interaction
going on. It is just asking too much of people. Game theory imposes a
huge amount of abstract reasoning on the part of people …

That is why I think game theory, as an approach to large scale interaction, is probably not the right way to go.

Alan Kirman



  1. I still think that a really important insight comes out of game theory: as soon as people start to worry about the fact that what they do has an impact on what other people do (and they start to think about it), that makes life very different. – Alan Kirman

    • True, but most people knows that without having to take a course in Game Theory 😆

      • Economists are not most people. To understand that people are engaged in strategic interaction and not the legendary perfect competition probably does require several courses in game theory for an economist. You might be an exception. (I do recommend the work of my old teacher, Martin Shubik, who used game theory productively with both eyes on the real world.)

    • People who actually do play games, like poker players, past a certain level of expertise, realize, as Axelrod points out in “The evolution of cooperation”, that in general there is no solution to n-person or non-zero sum games. The best strategy depends upon what other people are doing. In poker parlance, you have to read the table. That does not mean that players do not recognize equilibria, if one presents itself.

      At his blog, Information Transfer Economics, Jason Smith initially assumes that people make choices randomly, and often notes that his predictions beat those of game theory time and again.

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