Nash Equilibrium Game Theory

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A good starting point for economic study of social decision making is game theory. Game Theory provides a useful foundation for the study of decisions in a social context. It seeks to find the different strategies that decision makers will coincide on while trying to maximize their own payoffs. Nash equilibrium refers to the set of strategies from which no individual players can increase their payoffs by altering their strategies unilaterally. For example, in a competitive game between two players known as the Matching pennies, each player can choose between two alternative options (head or tail of the coin). If both the players choose the same option, one of the players wins, and loses otherwise. For the matching pennies game with the uniform…show more content…
It can be illustrated by the well known game of the prisoner’s dilemma. Two players participate in this game, and each can choose between defection and cooperation. Each player receives a higher pay off by defecting, regardless of whether the other player chooses to defect or cooperate, but the payoff to each player is much higher for mutual cooperation than for mutual defection, hence creating a dilemma. If this game is played only once, and each player care only about their own pay offs, then both players should defect, which corresponds to the Nash equilibrium for this game. Games can be played repeatedly among the same set of players. So there is a possibility that some players might train others and force them to deviate from the predictions of the Nash equilibrium for one-shot games. Even humans often cooperate in the prisoner’s dilemma games, regardless of whether the game is one-shot or repeated. Therefore, for humans, decision making in social contexts may not be entirely but partially driven by their self-interest or their preferences considering the well-beings of other individuals. In fact, altruistic and cooperation behaviours abound in human societies, and might also have existence in other non-human primates. . . Ironically, costly punishment of defectors or free-riders, which is often referred to as altruistic punishment, also provides an effective means to deter defection. .…show more content…
In a dictator game, first the dictator receives a fixed amount of money then donates a part of that money to the recipient. This ends the game, so there is no opportunity for the recipient to fight back. The amount of money donated by the dictator provides a measure of altruism as any amount of donation reduces the payoff to the dictator. During dictator games, people tend to donate on average about 25% of their money. An ultimatum game is similar to the dictator game. The Ultimatum Game (UG) is used to examine the responses to fairness. In the UG, two players divide a sum of money under the specification of the proposer. The responder has the option of either accepting or rejecting the offer. If the offer is accepted, the sum is divided as proposed earlier. And, if it is rejected, neither player receives anything. If the players are motivated by self-interest, knowing that the responder would accept any offer, the proposer will offer the smallest nonzero amount. However, this prediction of Nash equilibrium is at odds with observed behaviour, and the modal offer is a split of 50/50. The average amount offered in ultimatum games is about 40%, and since this
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