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Posted by: Michael Mandel on October 12
Tyler Cowen of Marginal Revolution responds to my criticism of game theory here:
I can think of possible responses:
1. Behavioral approaches will flesh out how humans actually behave. Game theory will end up with clear predictions, just give it time.
2. Computational approaches will flesh out how humans actually behave. Game theory will end up with clear predictions, just give it time.
3. Evolutionary approaches will flesh out how humans actually behave. Game theory will end up with clear predictions, just give it time.
4. Experimental approaches will flesh out how humans actually behave. Game theory will end up with clear predictions, just give it time.
5. The real world is in fact indeterminate or close to indeterminate. The indeterminacy and multiple equilibria of game theory are not a problem, but rather reflect how closely the theory mirrors reality. Yes you might prefer sharp, clear predictions, but tough tiddlywinks, you’re not going to get them. Faithfulness to reality is more important than fulfilling abstract methodological strictures.
Any one of these answers would suffice and allow us to push full steam ahead, or in the case of #5 declare victory and go home. The problem is that we don’t know which one is true.
The bottom line: Like so much of economics, the strongest argument for game theory is simply to chat with someone who doesn’t know any.
I’m sorry…I just don’t understand what Tyler means by #1-4.
I completely agree with Tyler’s #5, about the essential indeterminacy of the real world, but I don’t agree that game theory helps us think about it in the right way. The set of possible equilibria of a repeated game is far too broad to be useful. We can get good equilibria, bad equilibria, and everything in between.
Behavioral economics embodies uncertainty as well, since the reference level or status quo can be hard to determine. But in the end I feel more comfortable that I’ve learned something general about the way that people behave from behavioral economics (i.e. the principle of loss aversion) than from game theory.
There’s also a broader question: What do we expect from economics-accurate predictions, falsifiability, or what? I sometimes get the feeling that economists are applying too low a standard.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.