How do you explain game theory to stakeholders?

1 What is game theory?

Game theory is based on the idea that rational agents will choose the best option for themselves, given what they expect others to do. A game is a model that describes the possible actions, outcomes, and payoffs for each player in a situation of interdependence. A payoff is a measure of the benefit or cost of a particular outcome for a player. A game can be represented in different ways, such as a matrix, a tree, or a network.

2 Why is game theory useful?

Game theory can help you analyze complex and uncertain scenarios where you have to interact with other players who have their own goals and preferences. It can help you identify the optimal strategy for yourself, or the equilibrium outcome, where no player can benefit from changing their action. It can also help you predict how others will react to your actions, and how you can influence their behavior. For example, game theory can help you decide how to price your product, how to bid in an auction, how to negotiate a contract, or how to cooperate with a partner.

3 What are some key concepts of game theory?

Game theory involves several key concepts, such as types of games, dominant and dominated strategies, Nash equilibrium, and Pareto efficiency. Games can be classified according to the number of players, the information available, the timing of moves, and the nature of payoffs. For instance, a prisoner's dilemma is a two-player game where each player has to decide whether to cooperate or defect, and the payoff depends on the combination of choices. Additionally, a dominant strategy is an action that is always better than any other action, while a dominated strategy is an action that is always worse than some other action. Notably, a Nash equilibrium is a combination of actions where no player can improve their payoff by changing their action. Lastly, a Pareto efficient outcome is one where no one can be made better off without making someone else worse off; it is a socially optimal outcome.

4 How do you apply game theory to real-world situations?

To apply game theory to real-world situations, you need to identify the players, their actions, payoffs, and rules of the game. Then, use game theory tools such as matrices, trees, or networks to represent the game and find the possible outcomes and equilibria. After that, compare the outcomes and equilibria with real-world data and observations to evaluate their relevance and validity. Additionally, consider how the game can change due to uncertainty, communication, reputation, or learning. Finally, explain the game theory concepts and results to your stakeholders in a clear way, emphasizing implications and recommendations for your business objectives and strategies.

5 What are some challenges and limitations of game theory?

Game theory is a powerful and versatile tool, but there are several challenges and limitations that you should be aware of. For instance, game theory assumes that players are rational, self-interested, and consistent in their choices, which may not always be the case in reality. Additionally, the complexity of game theory increases when the number of players, actions, or outcomes increases or when the game involves dynamic or repeated interactions. Moreover, game theory is an abstract and simplified representation of reality that may not capture all the details and nuances of a specific situation or industry. It also may not account for ethical, social, or environmental consequences of the actions and outcomes.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?