Game theory: not nonsense any more
Game theory has always been one of the most stylised, theoretical - and unrealistic - disciplines within economics. Its assumptions are much too strong for the real world: pure rationality, perfect mutual knowledge of the rules of the game and the payoffs for each player. Game theory does certainly provide insight into many realistic phenomena - the prisoner's dilemma is the classic example, variants of which can be seen all over the economic world. But I have never been especially inspired by the exercise of working out Nash equilibria, because they usually illuminate only the stylised game that has been written down, and not the world that it is meant to model. However, two relatively new variations on game theory are making the field more interesting. The first is the idea of learning . For example, Fudenberg and Levine's book, The Theory of Learning in Games , sets out ideas of how real people playing games can come close to rational behaviour by trial and error, pay...