Thursday, October 13, 2005

Game theory

The Economic times
The Nobel Prize in economics for 2005 has been awarded to Robert J Aumann and Thomas C Schelling for their contributions to the theory of games. Game theory is the analysis of strategic choice. It concerns situations where a group of people (called players) take decisions which affect each other. Thus a player can paradoxically strengthen his position by voluntarily foreclosing some of his options. The Spanish general Cortez who colonised Mexico burnt his boats on arrival demoralising his adversaries because they knew that his army could not retreat.

While Aumann has been one of the builders of the formal structure of game theory, Schelling has been one of its inspirations as well as one of its leading exponents. His most important contribution is his 1960 book The Strategy of Conflict, a book rich in ideas anticipating many subsequent formal developments. In a sequence of models, he formulated the notions of “credible commitment” and “brinkmanship”. Schelling has applied game theory to a variety of situations ranging from arms control to environmental policy to racial segregation. Schelling also developed a formal theory of deterrence via the threat of retaliation and showed that it may be more effective if you deliberately leave your response uncertain. His ideas were influential during the Cold War and he even acted as a consultant in Stanley Kubrick’s classic 1964 film Dr Strangelove.

(The author is professor, Indian Statistical Institute, New Delhi)

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