Assess the practical usefulness and the relevance of game theory in Essay

Assess the practical usefulness and the relevance of game theory in light of the demanding assumptions behind the concept of the - Essay Example On e would be able to find out the importance and demerit of using Nash equilibrium in the real world. Introduction Game theory refers to the study of the techniques of decision making. The study gives calculated methods of giving a strategic decision in an economic issue. It puts related disciplines of philosophy, mathematics and psychology in making strategic decision making. Since its invention in 1944 by John von Neumann and Oskar Morgenstern, it has undergone severall improvement and applications. The Nash equilibrium is a concept in game theory that gives solutions to games that involves more than one player. In Nash equilibrium, every player makes the best decision considering that the opponent would make their own best decision too. Jon Nash realized that one has no capabilities to tell and predict others’ decisions by only viewing one case. Isolation prevents proper analysis of decisions. In addition, every player knows that there is nothing to gain by changing their strategy. Therefore, the only option left for a player is to get know what one player would do by considering the others’ decisions in the process. Game theory uses the concepts of Nash equilibrium when making an analysis of strategic interaction that occurs between the decision makers. Throughout history, Nash’s equilibrium concept has been useful with practical application in times of war and arms races. Some of the practical applications of Nash equilibrium include; mitigation of members in conflict by use of repeated interactions, determining the point in which people of different preferences may agree to cooperate, occurrence of currency crises, the flow of traffic on busy roads, setting up regulatory regulations and during soccer when kicking penalties (Myerson 2013, p56). In Nash equilibrium, everybody gets involved in a game the moment their fate is a point where the decision depends on the other person playing the game. The game does not have all the practical conditions that exist in the real world. Some of the unrealistic assumption that the game assumes are as follows; the concepts operate in the assumption that the players possess powerful computing techniques, through which, they analyze every situation giving no chance to any faults. Human beings operate under situations that may involve a lot of unforeseen situations. Thus, humans are prone to making incorrect decisions during the period. In addition, the concepts call for radical decisions that raise a lot of questions (Zhao 2007, p89). Another unrealistic nature is that it gives either the optimum or a value at equilibrium. It does not give a true value. In pratically, the scenarios are true and would require two choices giving true results. That is; the results of the prisoner’s dilemma are not as optimum as the theory tends to show. In some of the cases, the concept could be unreliable and misleading the practical user. However, such cases are limited since the Nash equ ilibrium has registered many instances of positive feedback. Nash equilibrium sets up a base in which other theories and practical scenarios can base their applications for success in the real world (Zhao 2007, p77). Conditions that exist in the real world seem to be more complicated that in examples. For example, if an event that two competing companies set their market price at say, $10, one company would attempt to set a slightly lower price to increase its sales, as long