Why is game theory useful in business?


Game theory was once hailed as a revolutionary interdisciplinary phenomenon that combines psychology, mathematics, philosophy, and a wide mix of other scientific fields. About 20 game theorists were awarded the Nobel prize in Economics for their contributions to the discipline, but outside the academic level is game theory really applicable in the modern world?


Game theory in business

A classic example of game theory in business arises in the analysis of the economic environment, which is characterized by oligopoly. Competing companies have the opportunity to take the basic pricing structure agreed with other companies or enter the Lower schedule price. Despite the fact that in the common interest to cooperate with competitors, the next logical thought process causes firms to default. As a result, worse. Although this is a fairly simple scenario analysis, the decision had an impact on the overall business environment and is a major factor in the use of contracts for compliance.

Game theory has branched out to cover many other business disciplines. From the optimal strategy of a marketing campaign to guide the decisions of the war, the perfect tactic the auction and ballot styles, game theory provides a hypothetical framework with material implications. For example, pharmaceutical companies routinely make decisions on whether to sell a product immediately and gain a competitive advantage over rival firms, or prolong the testing period of the drug. If the bankrupt company is liquidated and its assets sold at auction, which is the ideal approach for the auction? What is the best way to structure graphics vote? Since these decisions involve numerous parties, game theory is the basis for rational decision-making.

Nash Equilibrium

A Nash equilibrium is an important concept in game theory, referring to a stable state in a game where neither player can gain an advantage by unilaterally changing its strategy, assuming that other members do not change their strategies. Nash equilibrium provides a solution concept in noncooperative game. The theory is used in Economics and other disciplines. It is named after John Nash who received the Nobel in 1994 for their work.

One of the most common examples of Nash equilibrium is the prisoner’s dilemma. In this game there are two suspects in separate rooms being interrogated at the same time. Each suspect is offered a lighter sentence if he confesses and gives another suspect. An important element is, if both confess, they will receive a more severe sentence than if it had not suspected said. The mathematical solution presented in the form of a matrix of possible outcomes shows that logically both suspects to confess to the crime. Given that the suspect in the best option in another room to make a confession, the suspect confesses logically. Thus, this game has a unique Nash equilibrium both suspects confessed to the crime. The prisoner’s dilemma is a noncooperative game, as the suspects are unable to Express their intentions to each other.

Another important concept, the game is zero-sum also follows from the original ideas presented in game theory and the Nash equilibrium. In fact, any measurable benefits of one party equal the losses of another party. Swaps, forwards, options and other financial instruments often referred to as “zero-sum” tools, taking its roots from the concept, which now seems far away.

(For associated reading, see: game Theory: beyond the basics.)

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