Game theory, economics, and politics.

Game theory, which is a subset of chaos theory, has provided people with new tools which can lead to better understanding of how large systems operate. One area in which this new math will make significant differences in in economics.

If we assume that the goal of any economic system which we would adopt is to provide the greatest amount of wealth for the largest number of people then we can use basic game theory to explain why government regulation and wealth redistribution are necessary for the continuation of the game. Let's take a game like Monopoly to illustrate the principals.

Everyone starts out equal in terms of wealth and, presumably, has an equal chance to win the game but probability quickly creates disequilibrium as players land on different properties which contribute more or less to eventually winning the game. Fairly quickly, there are winners and losers in each round of turns and the winners become better able to insulate themselves from the negative effects of the 'shock' (ie significant illness, losing one's job, etc.) of landing on an unlucky property. Losers are unable to insulate themselves and it soon become evident who the eventual winner of the game will be. The winner is crowned when so much wealth is accumulated in one person's hands that it is impossible for anyone else to compete. Kind of like what's been going on in the US for the last 30 years.

If the players desire that the game should continue ad nauseum, (I hate Monopoly) then they must come up with some way to redistribute some of the wealth of the winners among the losers after each turn as well as provide some means by which those with less wealth can insulate themselves from shocks. A large hotel tax would serve this purpose, for instance. Of course, the winners will cry foul and claim that they worked hard for their hotels and why should they have to support the other players who are clearly just lazy and/or stupid.

Political systems are the only method through which this can be enacted and, to keep the game going, those political systems must be transparent to the participants and all participants must have equal access to influence in the decision-making process. Otherwise, those with more influence will insulate themselves from shocks and prevent appropriate redistribution of wealth.

A 'good' game would be one which rewarded people appropriately for their skills and decision making acumen and discounted for luck. With a simple game like Monopoly, it would be fairly easy (not for me!) to come up with a formula which accounts for luck and then redistributes any wealth gained as a result of luck. This would result in the game being a much better representation of the actual skills and acumen of the players as well as keeping the game going much longer, a result that would be bad if you're playing Monopoly but is probably desirable if you're playing Economics in the US.

a key component of keeping the game going is enlightened participation in the political process and the purpose served by politics. The Prisoner's Dilemma is useful in explaining how individuals should approach their participation in the political process. http://pespmc1.vub.ac.be/PRISDIL.html

A major difference in the political process and the description of the Prisoner's Dilemma on that site is that the 'players' in the political process are interdependent and the goal of participation in the political process is optimization for all players, not merely for one's self. Assuming that goal makes it obvious what the prisoners should do- both should cooperate since that maximizes the welfare of the group. This cooperation can only occur if the prisoners are in communication with each other, though. Absent any communication, the prisoners are forced to choose an option which will be less likely to result in significant harm to them and that is to defect.

I used to run a simulation of this in my classroom and almost always got the same results when there was no communication. Teams always assumed that the object of the 'game' was to 'win' by scoring the most points for the team even though my instructions clearly stated that the two teams were interdependent. This lead to one or both teams voting to defect and a suboptimal outcome for the two interdependent teams. I played this game with 5 rounds of votes and in most rounds both teams voted to defect.

This illustrates why we cannot rely solely on the 'free' market to allocate resources if we want our game to continue and to be relatively enjoyable for all players. The market experiences shocks and those who are winners, even if it's solely due to luck, will be able to insulate themselves from risk of future shocks. The winners also gain undue influence in the process of making/changing rules and use the political process to further insulate themselves from shocks. They also are able to prevent the other players from instituting the rules necessary for redistributing wealth because of this undue influence. Eventually, the game collapses due to insufficient distribution of wealth.

What I find missing - is simple.  You've assumed that translation of what you do in the "classroom game" is a model of human behavior - and that all participants in real life are equally informed.  they are not.

many grow up, with parents that teach a whole bunch of non-sense to their kids....   her are some notions...
1) don't worry - it is the govenment's JOB to take care of you.
2) you never have to pay for certain things, they are your right.
3) if you mess up - it is not your fault as the "system" was rigged.
4) you do not have to anticipate potential problems in your life...


sound familiar?  sure it does.  a couple of things... here.  first, you assume that all wish to accumulate wealth - and know how to.  a false assumption.... not all are equal in knowledge (your student subsets are roughly equal.... if you really want to have an interesting game... have 5-6 subsets as follows:
1) fully infomed of both the rules of the game and the goals of the game.
2) only informed of the rules
3) only informed of the goals....
4) informed of neither.
5) a random group of students from outside the class - in fact have never had any of your subject matter....

etc.)

Now that would be of significance... but they way you have set it up - it is in no way relective of the real world....

that is the problem.... trouble is I know a PhD mathematician who was hired as an analyst to use chaos theory to predict the market... I asked him how he is now modelling the market - after 4-5 years of doing this.... his reply "I don't, I go on the trading floor as knowledgable as I can be about specific trades I want to make, but I am as in the dark about the prediction regarding the specifics of market performance - as the guy standing next to me... and he does not have a PhD in chaos theory..."

so much for that....

I argue about what constitutes a realistic "control" for scientific studies.... We all know about the placebo effect, but recently it has come to light that there are much more subtler influences on both study and control groups in various types of population studies.... I've come to the conclusion that multiple "control groups" need to be devised to discern the effect of being in any study to begin with....

example... put LSD into a salt shaker... where no one knows that they are in a study... would it have an effect?   provide blood pressure medication in the drinking water.... would everyone have a nice lowering of their blood pressure???

These are NOT easily answered questions.... and I reject lots of papers because I do not find the control of the study adequate - and therefore the investigator is likley to draw the conclusion that there is (or is not) an effect - when in fact the opposite may be true...

food for thought...

you appear ignorant.

There are so many incorrect statements in your post it is almost mind-boggling.

First, game theory is not a subset of chaos theory. I have no idea why you might think that, but its wrong. And "new tools", "new math" ? Game theory has been around at least since the 1950s from Von Neuman and Morgenstern's seminal work. And although refinements are still being made (as with all kinds of mathematics) game theory was not invented last week.

Second, games can be both of a non-cooperative or cooperative variety. Nobels in economics have been given to Schelling for his advancements in the latter (based on work in the 1960s), and last year three people won for their contributions to auctions using game theory. And of course John Nash, Selten, and Harsanyi (1994), for developing and applying the concept of equilibrium in non-cooperative games.

Third, not all games are prisoner's dilemmas. That is a very restricted class of games whereby everyone playing their dominant strategy, everyone winds up worse off than by cooperating. There are a great number of other varieties of games without that characteristic, even when everyone tries to maximize their own personal net benefits.

Fourth, you do not need communication to get cooperative outcomes. Ever hear of repeated games?

Fifth, the analogy to monopoly is just plain stupid. The way to win the game is to have more than anyone else, regardless of how much you actually have. And the only way to actually win, unless everyone just agrees to quit, is to bankrupt the other players. If you lose all your stock market value, and I lose all mine except for $5, I would hardly consider myself a winner in real life. But I would win with that final score in monopoly. Therefore, the goals, and strategies of monopoly differ from actual markets. Not even to mention the understood key component of randomness that occurs every turn by rolling the dice.

There is plenty more, but I've gotten tired of typing.

You guys are hopeless.

I will correct the error about chaos theory. I should have said thet game theory is a subset of complexity theory.

is Stale Mate. Used during the Cold War.

Read the Book on Game Theory by Avinash Dixit, Princeton.