is a concept that deals with the formulation of the correct
that will enable an individual or entity, when confronted by a complex
in addressing that challenge.
It was developed based on the premise that for whatever circumstance, or
for whatever 'game', there exists a strategy that will allow one to
'win.' Any business is a game played against competitors, or even
against customers. Master the rules of the business you're in and
you'll win the game, so says Game Theory.
Game Theory is
not a new concept, having been invented by
John von Neumann and
in 1944. At that time, the mathematical framework behind the concept
has not yet been fully established, limiting the concept's application to
special circumstances only. Over the past 60 years, however, the framework
has gradually been strengthened and solidified, with refinements ongoing
until today. Game Theory is now an important tool in any
strategist's toolbox, especially when dealing with a situation that
involves several entities whose decisions are influenced by what decisions
they expect from other entities.
Game Theory involves the study
of how the final outcome of a competitive situation is dictated by interactions among the people involved (also referred to as 'players' or
'agents'), based on the goals and preferences of these players, and on the
strategy that each player employs. A
is simply a
predetermined 'program of play' that guides a player as to what actions to
take in response to past and expected actions from other players.
Game Theory has
some of which are: 1) the
which refers to a person or entity who have their own goals and
preferences; 2) the
which is an abstract concept that indicates the amount of satisfaction
that an agent derives from an object or an event; 3) the
which pertains to a situation participated in by several agents (now
referred to as 'players', since they're in a game), each of whom is trying
to maximize his utility of the game by anticipating the actions of the
other players and responding to them correctly; 4) the
which is what a player knows about what has already happened in the game,
and which can be used to come up with a good strategy; 5) the
which characterizes the order of play employed in the game; and 6) the
which is an outcome of or a solution to the game.
In 1950, Albert
Tucker of Princeton University invented the
an imaginary scenario that is undoubtedly one of the most famous
representations of Game Theory. Here, two prisoners were accused of
the same crime and eventually given three possible outcomes: 1) if one
confesses and the other does not, the confessor will be released and the
other will be imprisoned for a long period of time; 2) if neither
confesses, both will be imprisoned for a short period of time; and 3) if
both confess, both will be imprisoned for an intermediate period of time.
In the end, both prisoners conclude that the best decision is to confess,
and are both sent to intermediate imprisonment.
A new concept
related to Game Theory is the Nash equilibrium, which was developed by
John Nash for his PhD thesis. In a game, players would tend to
change strategies from time to time to improve their respective positions. The
is the point at
which no player can improve his or her position in the game by changing
strategy. In the Prisoner's Dilemma, the Nash Equilibrium is the point at
which both prisoners confess, since whoever changes this strategy will be
sent to a long prison term, instead of an intermediate one.
Game Theory is
said to be too rational to be used in the reality of an irrational, modern
business world. As such, companies that usually embrace it are those
which are in a business sector where there are but a few players, and for
which the rules are very tightly regulated, such as the oil industry.
In such a 'playing field' where rules are to be followed and behavior can
be rationalized, the best competitive moves can be formulated using Game
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