Into the Laboratory
Original work in game theory consisted entirely of modelssimplified representations of the underlying logic in economic decision-making situationswhich may have contributed to the business world's reluctance to accept its usefulness. A theory in physics or biochemistry can be tested in a controlled laboratory situation. In real-world decision making, however, conditions are constantly altered as a result of changes in technology, government interventions, organizational restructuring, and other factors. The business world and most economists found it hard to see how reading Theory of Games and Economic Behavior could actually help them win games or make money.
In the early 1960s, Charles R. Plott and his colleagues at the California Institute of Technology started to make game theory into an experimental pursuit. Supported by NSF, his group conducted a series of experiments that helped to answer questions about one facet of game theory: the ideal number of stages in an auction and their overall length. Experimentation, which Plott referred to as "debugging," became increasingly popular in economics as a complement to field research and theory.
The general idea was to study the operation of rules, such as auction rules, by creating a simple prototype of a process to be employed in a complex environment. To obtain reliable information about how test subjects would choose among various economic alternatives, researchers made the monetary rewards large enough to induce serious, purposeful behavior. Experiments with prototypes alerted planners to behavior that could cause a system to go awry. Having advance warning made it possible to change the rules, or the system for implementing the rules, while it was relatively inexpensive to do so.
Other economists refined and expanded game theory over the years to encompass more of the complex situations that exist in the real world. Finally, in the early 1980s, business schools and Ph.D. programs in economics began to appreciate the power of game theory. By the 1990s, it had all but revolutionized the training of economists and was a standard analytical tool in business schools. In 1994, game theory received the ultimate recognition with the award of Nobel prizes to Nash, Selten, and Harsanyithree pioneering researchers in the field.