Assumptions of game theory

Hypothesis: Game theory provides an appropriate solution of a problem if its conditions are properly satisfied. These conditions are often termed as the assumptions of game theory:

  1. A player can adopt multiple strategies for solving a problem.
  2. There is an availability of pre-defined outcomes.
  3. The overall outcome for all players would be zero at the end of the game.
  4. All players in the game are aware of the game rules as well as outcomes of other players.
  5. Players take a rational decision to increase their profit. Players are serving self-interest only.

The last two assumptions make the application of the game theory confined in the real world.

Predictability is an important characteristic of law-governed phenomena. It is an essential part of the scientific method, sometimes called the hypothetico-deductive-experimental-observation method.

In the first step, freely invented hypotheses are proposed. In the second, reason, logic, and mathematics are used to deduce quantitative implications of the hypotheses. These deductions suggest observations and experiments (step 3), especially those that can provide quantitative measurements. The best hypothesis is the one that predicts observations or experiments that confirm (verify) or deny (falsify) the implied theory, and more specifically the one hypothesis that leads to quantitative measurements in agreement with the prediction.

But what does agreement mean? Predictions are never in perfect mathematical agreement with the observations and experimental measurements. When measurements are repeated (as they must be, preferably by independent observers), they scatter randomly around some average value in a “normal distribution.” Confirmation of a prediction is when the prediction lies within an acceptable error (usually reported as “number of standard deviations”), a range of values around the average measured value 1).

Hindsight bias, also known as the knew-it-all-along effect or creeping determinism, is the inclination, after an event has occurred, to see the event as having been predictable, despite there having been little or no objective basis for predicting it.

Part of the argument that Fooled by Randomness2) presents is that when we look back at things that have happened we see them as less random than they actually were.