The Game Theory

The game theory is the study of strategic decision making.

It attempts to determine mathematically and logically the actions a “participant” should take in order to secure the best outcome for themselves in a wide assortment of “games”. The games it studies range from simple board games like connect 4 and chess (which admittedly is not so simple) to intimidating monopolies and manipulation of entire economies!

Pretty schway huh?

There are two types of games:

Finite games: A game is said to be finite when each player has a finite number of options, the number of players is finite, and the game cannot go on indefinitely.

Infinite games: A game is said to be infinite when each player has an infinite number of options, the number of players is infinite, and the game can go on indefinitely.

Now that we’ve established that, let me add something to it.

Finite games can be played within an infinite game, but an infinite game cannot be played within a finite game.

What the heck is going on you may ask… let me geek out!

The objective of a finite game is to win. Every component of a finite game must come within certain boundaries and can be mathematically accounted for. The rules of a finite game are built upon terms by which the players can agree on who won. These ‘rules’ restrain the freedom of players, only allowing them to make a choice within said restraints. Rules are licit only if and when players freely play by them. In a finite game, the rules are fixed until there is a winner (the one who was obviously smarter), but in an infinite game, the rules must change during the course of play. The rules of an infinite game are changed to prevent anyone from winning the game, and to bring as many other persons as possible into play. The rules of a finite game are like the rules of a board game, infinite game, the economy. The rules of the board game dictate how the game ends, the rules of individuals and firms ensure the economy continues. Finite players play within boundaries, infinite players play with boundaries.

Ever heard about the OPEC?

Initially founded by five countries (Iraq, Iran, Saudi Arabia, Venezuela and Kuwait) in 1960, the Organisation of the Petroleum Exporting Countries (OPEC) is now the worlds largest oil cartel, in control of an estimated three quarters of the world's "proven" oil reserves. The cartel is made up of 14 major oil exporting countries across the world, who together account for nearly half of global oil production, granting them a massive influence over its price. In 2016, they were bringing 39 million barrels of oil to the market per day, out of the 92 million produced around the world.The market for oil, once dominated by American multinationals, now subject to every beck and call of the OPEC. While they had the ultimate power to be able to manipulate the price of oil in the global market, the OPEC was destined to face some troubling times. This could be attributed to the fact that the members of OPEC face a prisoner's dilemma.

Prisoners dilemma is probably the most well-known example of the game theory. Let’s say that hypothetically two criminals are arrested for a crime, and the prosecutors have no solid evidence to convict them. However, to gain a confession, officials confine the prisoners to solitary cells and question each one in separate chambers. Neither prisoner is granted the means to communicate with the other.

Officials present 4 deals:

1. If both confess, they will each receive a 5-year prison sentence.

2. If prisoner 2 confesses but prisoner 1 does not, prisoner 1 will get 20 years and prisoner 2 will go free.

3. If prisoner 1 confesses but prisoner 2 does not, prisoner 1 will go free years and prisoner 2 will get 20 years.

4. If neither confesses, each will serve 1 year in prison.

The most favorable strategy is to not confess. However, neither is aware of the other's strategy and without certainty that one will not confess, both will likely confess and receive a 5-year prison sentence.

The game is most easily understood by means of a payoff matrix :

The members of the OPEC are faced with a identical dilemma to that of the prisoners. Their best course of action would be to slow down the supply of oil (to an extent) to raise prices, increasing returns for all parties involved. Similar to the situation the prisoners are in, even though this would be smartest choice for them as a collective, it makes more sense on an individual level for them to increase supply. If everyone else in the cartel is cutting supply, prices inadvertently are higher, so each member has an incentive to sell as much of their oil reserves as possible. Therein lies the dilemma. Betrayal almost always seems like the better option, even though it ultimately makes everyone worse off.

I guess what I'm trying say is that... I'm winning that game of Snap next time!

J