How Game Theory Works
Besides game theory having its applicable functions, it does not fall short of criticism. In has been noted that game theory can help only so much if one is trying to predict realistic behavior. According to Tom Scheve, every action, good or bad, can be rationalized in the name of self-interest.
A common difficulty with game theory modeling is defining, limiting, isolating or accounting for all sets of factors and variables that influence strategy and outcome. Usually, there is an X-factor that not be considered for; for example, no approach can predict the actions of a negotiator who is going through a religious revelation.
Game theory is often based on rationality. In traditional economic models, rationality is described as the maximization of one’s own payoff. Hence as Scheve puts it, in every situation, you will always act to gain as much as possible, regardless of how it affects others. Often, studies have found that the subjects most likely to fully embrace the economic model of a self-serving, payoff-maximizing agent are kindergarten kids, however, that by the fourth grade, their behavior starts to favor cooperative strategies.
Game theory argues that cooperation amongst players is always the rational strategy, at least when participating in a game-theory experiment. Scheves describes a scenario where you participate in what you are told in a single game. To succeed in this game, you ought to take advantage of the other player. After doing so and winning, you then learn that this game is indeed one of two games in a series.
Being that the roles are reveres, the test-givers want to see how Player 2 behaves after Player 1 defects in the first game this being the true purpose of the study. At this point, your rational, self-maximizing action in the first game is now irrational outside the framework of a one-shot game.
Reference
seangametheory 