# Game Theory - Descriptive, Normative or Prescriptive?

Going through life we often are surprised by the different ways how people think, make decisions and interact. We believe that most of us are rational human beans (to some extent) and, therefore, our decisions should be grounded in analysis of the situation, our experience and intuition. Therefore, the human mind can be seen as an incredibly complicated machine that runs series of theoretical simulations of possible situations (often subconsciously) to find the most optimal course of action, taking into consideration the possible strategies of others. When the decisions are important to us and the reasoning process is conscious, we engage in strategic thinking. It has always been tempting to develop a theory that would actually explain and predict the human interaction based on strategic thinking, therefore making the strategic decision making more effective to both parties and without risk to going into “worst case scenario”. Therefore ideally game theory should cover the questions how the decisions should be made in order to maximize the gains, what reasoning does it imply, how to make the best choice of strategy and what will the pay-offs be for both parties. What questions does game theory actually answer – this is how the topic of this essay might be rephrased. In this essay the discussion will be focused on the question whether game theory is a descriptive, normative or prescriptive theory. First, a brief explanation of different types of theories should be given as well as the definition of game theory and the development in this academic field of study as well as the practical applications. Then the standpoint of the author will be defined and supporting as well as contradicting arguments based on various academic articles will be presented and discussed. The last part of the essay will sum up the discussed ideas and draw the final conclusions and remarks. To start with the necessary in-depth understanding of the essay topic, the distinction between normative, descriptive and prescriptive theories should be clarified. As it is known, normative theory deals with how things should be – what ought to be in context of the specific field of study. Descriptive theories

are concerned with explaining the way things happen (people behave) in real life, moreover the prescriptive theories aim to suggest how things should happen (or how people should react) and this could be just on theoretical level or also connected with the real life (therefore not only giving prescriptions on how to act but also the predictions on the future situations). Joseph B. Kadane and Patrick D. Larkey in their paper „The Confusion of Is and Ought in Game Theoretic Contexts” from 1983 reflects on the essay topic and distinguishes between different types of normative and positive theories: Among positive theories, we distinguish three types. Descriptive theories are concerned with empirical phenomena, but stop with a description. Explanatory theories go further by addressing "why questions." Finally, predictive theories discuss what behavior will be. We also distinguish between two types of normative theory, both concerned with what behavior should be. Speculative statements are nonoperational usually consisting of a goal or criterion (e.g., maximize utility or profit) with no precise instructions on how one might accomplish the goal or apply the criterion. Prescriptions are operational in that they give both a goal (or criterion) and feasible procedures (an algorithm) for accomplishing it. From this quotation it can be clearly seen what theory distinctions in game theory context are made. The essay author will adopt this view and within normative theories take into consideration both speculative and prescriptive types of theories, within descriptive theories include both descriptive and explanatory types and within prescriptive theories look at predictive and prescriptive (for real life...

References: 1. Camerer Colin F. (1991). ”Does Strategy Research Need Game Theory?” Strategic Management Journal Vol. 12, Special Issue: Fundamental Research Issues in Strategy and Economics pp. 137-152 2. Carmichael, Fiona (2005). ”A Guide to Game Theory.” Prentice Hall. 3. Hutton, W. (1996). ”The State We’re In.” London: Vintage 4. Kadane Joseph B. and Larkey Patrick D.(1983). ”The Confusion of Is and Ought in Game Theoretic Contexts.” Management Science Vol. 29, No. 12 pp. 1365-1379 5. Nash J. (1950). “The Bargaining Problem” Econometrica, Vol. 18, No. 2 p. 155-162 6. Nash J. (1951). “Non-Cooperative Games” The Annals of Mathematics, Second Series, Vol. 54, No. 2, pp. 286-295 7. Rubenstein A. (1991). ”Comments on the Interpretation of Game Theory.” Econometrica Vol. 59, No. 4 pp. 909-924

8. Lindstädt H. and Müller J. ”Making Game Theory Work for Managers” McKinsey Quarterly, December 2009 . http://mkqpreview1.qdweb.net/Making_game_theory_work_for_managers_ 2493 date accessed 05.01.2012. 9. Flanders Stephanie. “A Nobel Prize for Beauty and Truth.” BBC (www.bbc.co.uk) 15.10.2012. http://www.bbc.co.uk/news/business19954671 date accessed 05.01.2012.

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