GAME THEORY , COMPLEXITY AND SIMPLICITY Part I : A Tutorial

The theory of games is now over 50 years old. Its applications and misapplications abound. It is now "respectable". Bright young economic theorists bucking for promotion need to be aware of agency theory, reputation theory, the new industrial organization, auction theory, refinements of equilibria, perfect equilibria, trembling hand equilibria, strong equilibria, Bayesian equilibria, problems with common knowledge and to be aware of game theoretic applications to biology, political science, law and even anthropology. The public is aware of phrases such as the "zero sum game". Many individuals who know next to no game theory have heard of the "Prisoners' Dilemma". The word "strategy" has been given a scientific twist. Newspaper columnists are already using or misusing the terminology. All in all, game theory has arrived. This note is divided into three parts aimed at being a tutorial, retrospective essay and critique. The tutorial is called for to help inform those who are uninformed. Possibly even more important, it aims to help inform those who are misinformed and may be somewhat misled by the academic fashion show. In particular the noncooperative equilibrium is explained and the use and limitations of its applications are discussed. The meaning of cooperative game theory is explained and its uses and limitations are noted. The reasons for the gross inadequacy of a dynamic theory of games are noted and the need for a considerably different approach is suggested 1 The key to understanding the uses and limitations of game theory is to appreciate that the game theoretic approaches are not monolithic and depending on which one the individual follows the world view obtained is highly different. In particular the four most important distinctions are: 1 Those who wish to delve further into details will find the three volume handbook editied by Aumann and Hart (1992, 1994 and 1997 forthcoming) to be of considerable assistance.