Monday, April 20, 2009

Introduction to Game Theory

Introduction to Game Theory
by Open Options Corporation - 2007

Summary:
Open Options Corporation defines Game Theory as "a branch of applied mathematics and economics that studies strategic situations where there are several stakeholders, each with different goals, whose actions can affect one another." According to the author, the benefit of conducting a Game Theory analysis is that it reveals the interactions of likely outcomes in situations where the end result is dependent on the actions of others, giving the analyst a better understanding of the situation and courses of action.

After a brief Game Theory history and credential check, Open Options discusses how Game Theory is applicable in business. Since the world of business focuses on competing against others with the goal of maximizing your own rewards, Game Theory is a natural fit to analyze possible business strategies.
"However, real business decisions have significant complications that are often ignored by abstract, academic game theory":
  1. Real business decisions almost always have many players, a challenge for classical game theory.
  2. Complex relationships among the players sometimes exist (i.e. some common and some competing issues exist between players).
  3. Business outcomes are often not easy to reduce to a common measure for value such as dollars or expected utility. Rather, strategic interests, long term relationships and the personal goals of the CEO or founder can be critically influential.
Other advanced Game Theory options exist to help model and solve complexities within business strategies, these include: n-player, non-cooperative, nonzero-sum, non-simultaneous, asymmetric, & ordinal game theories.

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