Geopolitical Alpha

Chapter 10Game Theory – It's Not a Game!

It is relatively easy to produce a cyclical, constraint-based net assessment. Sure, it takes a lot of research, but the subject is simple and discrete. The real challenge is to operationalize competing sets of constraints, such as when two countries or multiple sets of policymakers face off against one another.

The multiplayer and competitive factors in these circumstances make game theory a useful tool of analysis. Game theory allows the forecaster to formalize choices and the conditional probability of events. However, a formalized model where each choice is assigned a precise mathematical value does not guarantee a correct – accurate – forecast. Precision is not the same as accuracy, and the presence of one (mathematical precision) does not guarantee the presence of the other.¹ Game theory–based predictions are only as good as their empirical and contextual knowledge foundations. Without a solid base, they can be detrimental, even downright stupid.

In graduate school, I read some really stupid game theory papers. Political scientists – some of whom are essentially failed economists or mathematicians – would pick a topic, seemingly at random, to “formalize.” The outcome was often mathematically elegant, but empirically … well, inaccurate, and therefore useless in application.

From their mistakes, I learned how important it is to know something about the topic at hand – something concrete and empirical – before attempting to formalize ...