By Avinash Dixit and Barry Nalebuff
Have you ever had to dissect a complicated business scenario and were confused as to where to begin, or how to analyze the problem? Game theory is the science of predicting the outcome of a scenario or game by understanding the rewards and risks associate with each decision. Game theory can help anyone identify the best strategy or tactic given a goal or aspiration. This book is not only based on extensive research, but it includes real life examples and case studies to prove that game theory analysis works in different business settings. When game theory strategies are applied to everyday business situations, obstacles and challenges can be overcome and the end result can be a positive one. The book is filled with questions that will get the reader to think twice before they make their next decision, recipes to use game theory analysis in split-second situations, and case studies that demonstrate the power of using game theory.
One of the strongest points in the book is known as the “Anticipation of Situation.” The working theory is that there is always a mathematical formula that will predict the outcome of a game. The authors use an example from the television show, Survivor. Someone on the show decided they would “win by losing,” and it actually worked. When the candidate on the show threw their chance to win, it set a series of events in motion that eliminated some of the competition, and allowed that candidate to eventually win the game in the end. According to the authors, by studying the competition and their reaction to any situation that is presented, it is possible to, at the very least, even the score, and at the very best, to come out on top as the winner in any contest.
The authors also use entertainment as a way to get their points across. These stories are presented in the form of “tales,” and one of the most memorable ones is called “Pick a Number.” Readers are challenged to guess a number between 1 and 100 for five straight times to find the correct number that was chosen by them. The illustration concludes that this strategy is a good one, because the number setter and the searcher both know and understand the concepts behind finding the perfect information in game theory. That simply means “I know what you are thinking, and you know what I am thinking.”
There are three main game theories that need to be considered when making any important decisions. They include:
The Decision Theory — In a nutshell, this theory requires someone to consider all possible outcomes before they reach a conclusion. It will force the person to think about all of the factors involved in a scenario and imagine how they will be played out in the end. In many cases, the person making the decision already has an idea of what they would like to do, but they need to be open to all ideas and possibilities. It takes patience and strategic thinking to succeed in the Decision Theory.
The General Equilibrium Theory — While this particular theory is used extensively in economic policy issues to analyze stock markets and exchange rates, it can also prove useful when applied to other business ideas and concepts.
The Mechanism Design Theory — In this type of theory, the person understands all of the rules of the game, but questions their usefulness as to whether or not they are actually helping or harming the outcome. By embracing this theory, the person often times will be forced to develop their own set of rules that will give them the results they are looking for.
In the business world, making split second decisions on a daily basis is commonplace. Often times a bad decision can set of events into motion that can destroy an entire product line or a department. By learning and applying game theories into those split second decisions, the odds of a successful outcome are greatly increased.
The three main reasons game theory works in the business world are:
- It can help reduce the business risk – When applied correctly, game theory can assist when it comes time to creating the best pricing ideas and strategies, projected market shares and even income expectations. It will also help anyone better understand the customers and their decision making processes.
- It can help to understand the competition – In the business world, knowing everything about the competition is very important. By using game theory, a manager will gain more insight into the competition than ever before. It will allow a peek into knowing their weaknesses and strengths, and how they operate. The more information that is assembled about the competition, the better the end result.
- It can help with the decision making process – The best game players know and understand the importance of research when it comes time to making any decision. Smart business leaders will brainstorm every possible outcome before reaching any final conclusions.
Using game theories and strategies are important but the reader is cautioned that they are simply another set of tools used by management to accomplish goals. It is important to keep in mind that experience in business is also a major contributing factor to success. By combining game theory with experience, goals will be accomplished and obstacles will be overcome. No matter what industry the reader is involved in, game theory offers a new insight into the psychology of the thinking and decision making process. By taking the time to learn and understand game theory,