In this post, we’ll unpack all you need to know about Game Theory, defining exactly what it is, the rules, models, why understanding it is important, how to leverage it and more.
What Is Game Theory?
Game Theory (GT) is a branch of social science that uses a mathematical framework to study strategic decision making.
What Are The Rules?
A strategic interaction where players’ choices determine outcomes is referred to as a game. Games can either be cooperative (where players can form binding commitments) or non-cooperative (where players can’t form binding commitments), zero-sum or non-zero-sum and can be analysed in static (one-shot) or dynamic (repeated) settings.
Decision-makers involved in a game are referred to as players.
Choices are called moves. Moves can either be sequential (where players take turns making their moves one after the other) or simultaneous (where players make their moves at the same time without knowing the other player’s choice).
Plans of action available to the players are referred to as strategies. Outcomes resulting from the combination of strategies chosen by the players are known as payoffs.
Game Theory Models
Three primary Game Theory models include Nash Equilibrium, the Prisoner’s Dilemma and Dominant Strategy.
Nash Equilibrium involves a scenario where no player can benefit by changing strategies while the other players keep theirs unchanged.
Prisoner’s Dilemma involves a scenario where two individuals might not cooperate, even if it appears that it is in their best interest to do so, because of mistrust or the inability to communicate.
Dominant Strategy is a strategy that is best for a player, regardless of the strategies chosen by other players.
Deterrence & Compliance
Deterrence involves strategies that prevent opponents from taking undesirable actions through threats or negative consequences.
Compliance involves strategies that encourage opponents to take desired actions through incentives or positive rewards.
Threats & Promises
Threats are commitments to impose negative consequences if an opponent takes an undesirable action.
Promises are commitments to provide positive rewards if an opponent takes a desirable action.
Game Theory Tips
Firstly, look forward and reason backward.
Secondly, always use a dominant strategy if you have one. If you don’t have a dominant strategy, but your rival does, then assume they will use it and choose your next best response accordingly.
Thirdly, rule out any strategies that are never best responses and go on doing so successively.
Fourthly, in a zero-sum game, if it is disadvantageous for your opponent to see your actual choice in advance, then you benefit by choosing at random from your available strategies. The proportions in your mix should be such that the opponent cannot exploit your choice by pursuing any particular strategy from the ones available to them.
Why Understanding It Is Important
Understanding Game Theory is essential because it applies to almost any situation involving strategic decision-making.
GT offers insights into the dynamics of competition and cooperation, helping individuals and organisations navigate their respective environments more effectively.
Using the principles of GT allows individuals to make more informed decisions and helps them to more effectively achieve their desired outcomes in both personal and professional contexts.
How To Leverage Game Theory
There are three keys to leveraging Game Theory.
Firstly, understand the strategic environment of your decisions. Secondly, identify potential moves and countermoves. Thirdly, execute the best move given the expected behaviour of others.
Summary (TL;DR)
Game Theory is a framework used for analysing situations where individuals make decisions that are interdependent.
GT is essential because it provides insights into the dynamics of competition and cooperation. Thus, it allows individuals to make more informed decisions and helps them to more effectively achieve their desired outcomes.
The key to leveraging GT is firstly understanding the strategic environment of your decisions, secondly, identifying potential moves and countermoves and thirdly, executing the best move given the expected behaviour of others.
