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Free Example of Theory of Learning in Games Essay
The way people take risk when interacting with other people is a central issue for economics as far as the foundation of economic theory are rooted in models of individual and interactive decision making. For instance, to understand strategic behavior between organizations we need to understand how people trade risk and reward when their decisions interact. Most of the social sciences have taken expected utility theory and game theory as a starting point. Normative approaches aim to specify how people should be making risky or strategic decisions. The ‘rational choice’ approach to social science assume, that these normative theories also describe how people do indeed make their decisions. Therefore, expected utility theory and game theory can be viewed as both normative theories of decision making and as a descriptive psychological account. Expected utility theory is based on the assumption that people make choices that maximize their utility, and their utility for a risky decision is measured by the expected utility that this option of strategy will provide. This expected utility is a function of the utilities of the possible outcomes, measured by their probabilities. In cases, when decisions are interactive, each player makes decisions in the context of assumptions about the decision of the other player, but the other player may equally choose on the basis of assumptions about the decision of the first player. Game theory aims to deal with the concept of ‘Nash equilibrium’, according to which a pair of decisions obtain a higher expected utility by making a different decision, given that the other player’s decision is viewed as fixed. Psychologists and economists have found differences between the normative predictions and people’s actual behavior since the development of given above normative theories. Most applications of these normative models make fundamental assumption that the choice of a prospect of a game strategy should be based on the attributes of the current prospect or game and therefore is considered independently from previous prospects or games. This is called ‘sequential independence assumption’.
The other psychological phenomenon has proved, that people do not possess a well-defined notion of the utility of a strategy in an interactive game. It is considered, that people make choices depending on the other games being played. This phenomenon is called ‘game relativity’. While making strategic decisions in games, people must assess the magnitudes of risk and return that are associated with each strategy. For instance, when deciding whether it is worth cooperating in a given situation, a person must predict if the other player will decide to cooperate or to exploit him and also estimate the potential of gains and losses.
Everyone of us makes decisions every day. It may seem strange, but scholars prove, that some people might be better at decision – making, some are absolutely primitive doing this. Studying of decision-making process helps to make better decisions. Moreover, decision-making is considered to be a study of choosing alternatives based on values and preferences of the decision maker. A process of decision-making exists basically because of the alternative choices when only one has to be chosen. It is also defined as the process of reducing uncertainty and doubt about alternatives to allow a reasonable choice to be made from among them. It is important to understand that uncertainty is not eliminated, but reduced as far as only few decisions are made with absolute certainty, since the complete knowledge about all the alternatives is almost impossible. Therefore, a certain amount of risk is available in every decision making. There are different kinds of decisions. Some require only answers yes or no, either that or this. This decisions are made in the result of weighing pros and cons. Another decisions involve a choice of one or more alternatives from among a set of possibilities, the choice is based on how well each alternative measures up to a set of predefined criteria.
Some decisions may be made only when some condition is met. The available alternatives influence the criteria, and on the other hand the criteria we establish influence the alternatives we will consider. This may be cleared out in the following example: if we want to buy a house, first we are weighing the positives and negatives of buying a house. Then we move to the criteria, in other words we identify what kind of a house we want, then we would think about the alternatives likely to have these criteria. At the and we would evaluate each alternative according to the criteria and choose the one that meets criteria. It has to be taken into account, that every decision is made within a decision environment, which is defined as the information, values, alternatives and preferences available at the time of the decision-making. As a rule, the time and effort to gain information or identify alternatives are limited. It means that decision has to be made by a certain time.
However, the major challenge of decision making is uncertainty, and a major goal of decision analysis is to reduce uncertainty. It is almost impossible to make a decision with complete certainty, that is why most decisions involve certain amount of risk. As time passes, new information and alternatives appear, decision environment grows and expands. It is logically to put off making a decision until the deadline, as the alternatives grow as time passes, so it is important not to make a decision too soon. On the other hand, some alternatives might no longer be available if too much time passes. Delaying a decision provides more information, there is also more time for more detailed and thoughtful analysis. As the time passes, new alternatives might be recognized or the decision maker’s preferences might change.
It is wrong to assume that decisions are not connected and are made in the isolation from each other. Decisions are made in the context of other decisions. Decision-maker gathers information, explore alternatives, and makes choices with regard to decisions made before, therefore every decision follows from previous decisions, enables many future decisions, and prevents other future decisions. Although, making a decision causes a loss of freedom, on the other hand it creates new choices and possibilities. Every decision one makes affects the decision stream and the alternatives available immediately and in the future.
In order to make a decision, decision-maker has to possess some necessary information. In other words one has to have knowledge about the effects of the alternatives, the probability of alternatives an so on. It does not matter if one has little information, the main thing is to have appropriate and meaningful one. Alternatives may be defined as possibilities one has to choose from. Each alternative must possess some characteristics or requirements which are called criteria. Then, decision-maker has to identify what exactly he wants to accomplish, he has to maintain the goals. Finally, it is important to estimate how valuable the outcome is. Personal values usually dictate preferences, thus people are making decisions based on their own, individual preferences. It is sometimes hard to say, whether a decision is good or bad, as far as everyone makes a decision based on his own preferences, moreover, decision quality cannot be identified as good or bad, since even a good decision may have either positive or negative outcome. While making a decision one has to analyze how well chosen alternative meets the identified goals, and think if there are any negative consequences. Only decisions that are implemented with thoroughness will work the way they are intended to.
There are always numerous solutions to a given problem, our task is to choose only one that fits our requirements. The task of choosing can be simple or complex depending on the importance of the decision. In this case optimizing may be the strategy of choosing the best solution to the problem. One has to discover as many possible alternatives as he can and choose the very best one. Thoroughness of the optimizing depends on importance of the problem, on time available for the solving and on the availability of resources as well as knowledge and psychology of the decision-maker. In satisficing strategy, the satisfactory alternative is chosen rather than the best one. Maximizing strategy focuses on evaluating and choosing the alternative based on their maximum possible payoff. Minimizing strategy is one of the pessimist, when the worst possible outcome of each decision is considered and the decision with the highest minimum is chosen. According to minimizing strategy, it is better to get at least something instead of nothing. As to the approaches to decision-making, scholars usually point out two: authoritarian method, when an executive figure makes a decision for a group and the group method, when group itself decides what to do. In making a decision person usually moves back and forth. As was already said above, one have to be very careful in identifying the goals which the decision should achieve. The procedure of making a decision to certain extent depends on the facts available. Lack of information must not prevent person from making a decision, as sometimes using a partial knowledge is better than not making the decision when a decision is needed. Many decisions ultimately rely on or are influenced by intuition because of the remaining degree of uncertainty involved in the situation. Also, one has to take into account who will be affected by his decision.
It is important not only to develop alternatives, but also to rate each alternative. Positive as well as negative sides of each alternative has to be evaluated. Some alternatives that one might like best or which seem to be an obvious choice, may not be functional because of too much time, cost and lack of acceptance by others. In solving a problem we are searching for the solution that best solves the particular problem. In choosing a solution we are sure that it will work, but in every decision-making, however, there is always some degree of uncertainty. Therefore, there is always some risk that the solution would not work. Risk can be rated in various forms like percentages, grades, ranking. As far as every decision-making involves risk, it is helpful to examine risk analysis to understand what is involved. It is hard not to agree, that all decisions involve risk. We are not supposed to be afraid when we risk, as it is part of our life, if we take a closer look , it is obvious that risk is available in every aspect of our daily activities. In order to overcome the anxiety, we have to explain the risks and the drawbacks involved and tell why we believe the proposed benefits overweigh the negatives. Many risks have multiple possible outcomes, each outcome with its own probability of occurrence and its own value. The traditional strategy for evaluating risks is to use an expected value calculation, based on the simple idea that the expected value of a risk is the value of the possible outcome discounted by the probability of its realization. The expected value of a given decision in most cases is the sum of all the values of each outcome, each diminished by its individual probability.
Many fields of social sciences have researched decision-making theories. A decision is a response to a situation and it involves evaluation and judgment. Psychological decision theory focuses on how individuals decide, it reveals basic principles people use when dealing with problems. Rational methodologies explain how decision makers analyze a number of different outcomes depending on each alternative in order to select final choice. Psychological decision-making models suggest the existence of special mechanisms through which people process information and interpret their surrounding environments. On the other hand, rational decision - making models establish a weighing mechanism between a choice and value. The alternative is always selected whenever its expected value is greater than that of the other potential choices.
Basically, in games against nature, decision-making process is difficult because of the uncertain consequences or outcomes and because of certain amount of risk. Decision-making process provides answers to the questions like: how risky is the project? Which plan has to be followed? Which assumptions are most important? What kind of data should be gathered? It is important to identify what can be done, what is known and what one wants. Decision making is the basis of most technical, business and governmental problems. Decision analysis provides the methodology, it focuses mainly on what we don’t know, rather than on refining what we do know; it consists of three stages: structuring, evaluation an agreement. Difficulties in decision-making may be caused by lack of creative alternatives, also because too much time is spent on unimportant details. To make a proper decision, there has to be correct background, clear values and trade-offs, creative alternatives, and of course commitment to action.