What are the limitations of game theory?

What are the limitations of game theory?

Game theory has several limitations, including assumptions of rationality, incomplete information, and the complexity of real-world scenarios.

Can you explain the assumption of rationality?

Sure! The assumption of rationality means that players are expected to make decisions that maximize their utility, but in reality, people often act irrationally.

What about incomplete information?

Incomplete information refers to situations where players do not have full knowledge of the other players' preferences or strategies, which can lead to suboptimal outcomes.

Are there any real-world examples where game theory fails?

Yes, one example is the stock market, where irrational behavior and emotional decision-making can lead to market anomalies that game theory cannot predict.

How can we address these limitations?

To address these limitations, we can incorporate behavioral economics, use simulations, and consider more complex models that account for human behavior.