GAMEBOARD© Strategic Planning Process
Game Theory Background

Game theory seeks to find rational strategies in situations where the pay-off depends not only on one's own strategy, but on the strategy of other players. Other players might include competitors, governments, friends, sub-ordinates, superiors, customers and others.

The field of game theory began around 1900 when scientists began seeking whether there are optimal strategies for parlor games such as chess and poker and what those optimal strategies might look like.

The results have been applied to simple games of entertainment like chicken and prisoners dilemna, and more significant aspects of life, society and business. There are two fundamenal assumptions that underly all game theory. They are:

1. rationality - people make decisions to make themselves happy and they are clear what it is that will make them happy
2. common knowledge - everyone is aware that all other players share the same goal - to be happy - also.

It is these assumptions that make game theory a powerful decision making tool because emotional and political elements become important considerations in decision making process.

Game of Chicken

Two people drive their cars head on at each other. The first to swerve loses face amongst his/her peers. If neither swerves, both die.

The outcomes can be mapped like this where Driver 1 is on the left and Driver 2 at top:

There is a co-operative element in chicken if both players swerve. Both players live and neither can call the other a chicken.

Consider the impact if Driver 1 fixes his wheel (reduces his options) prior to the contest, and lets Driver 2 know. Unless Driver 2 is suicidal, Driver 1 has improved his chances of winning by reducing his options.

Game Theory and Business Example

Two competing firms must decide what to invest in advertising. The effectiveness of ABC's advertising is impacted by the effectivenss of XYZ company's advertising. XYZ's is affected by ABC's. So if both advertise during same period, effectiveness goes down and costs up. Both companies would benefit from a reduction in advertising. However, if ABC reduces and XYZ doesn't, ABC comes out a big winner.

Prisoner's Dilemna

Two prisoners are arrested by the police. There is insufficient evidence to convict either suspect. The police offer the same deal to both: 1) if Prisoner A testifies against Prisoner B and B stays silent, B will receive a 10 year sentence and A will go free 2) if both stay silent, both will recieve 6 months 3) if A and B testify against each other, each receives a 2 years sentence.

The possible outcomes look like this where A is on the left and B is at the top:

The optimal outcome for each player is to co-operate and avoid a lengthy sentence. However, in this game the players can't do that. From a game theory perspective, the best strategy for each player is to betray the other because in the absence of co-operation, betraying provides the best possible (though hardly perfect) outcome.

Interesting Game Theory Links

http://www.gametheory.net/ http://www2.owen.vanderbilt.edu/mike.shor/courses/game-theory/