Game Theory: Limitations and an Alternative

The purpose of this paper is to describe current practice in the game theory literature, to identify particular characteristics that ensure the literature is remote from anything we observe and to demonstrate an alternative drawn from agent based social simulation. The key issue is the process of social interaction among agents. A survey of game theoretic models found no models representing interaction among more than three agents, though sometimes more agents were involved in a round robin tournament. An ABSS model is reported in which there is a dense pattern of interaction among agents and outputs from the model are shown to have the same statistical signature as high-frequency data from competitive retail and financial markets. Moreover, the density of agent interaction is seen to be necessary both to obtain the validating statistical signature and for simulated market efficiency. As far as competitive markets are concerned, game theoretic models evidently assume away the source of the properties observed in real high frequency data and also the properties required for market efficiency.