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Game Theory in Business
Transcript of Game Theory in Business
Players – Decision makers in the game.
Actions – Possible choices made by the players.
Strategies – Plan of action made by the players.
Payoffs – Rewards at the end of the game.
Outcome – The final result. History
In 1913, the first theorem stated that in chess either white can force a win, or black can force a win, or both sides can force a draw. This theorem was published by Ernst Zermelo and called Zermelo's Theorem.
In 1921-27, Emile Borel published 4 notes on strategic games. He gave the first modern formulation of a mixed strategy along with a minimax solution for two-person games with 3 or 5 possible strategies. What is game theory?
And how does it relate to business? Real Life Example of
Game Theory - The Prisoner's Dilemma How Game Theory Can Work in Business
Real Estate Transaction:
Scenario: You put an offer on your dream home, the owners of the home do not accept the offer, but they make a counter offer.
Actions: You have a couple of options; you offer a higher price or withdraw the offer.
Outcome: You either buy the house by overbidding, or lose it by not placing the highest bid.
Payoff: You either buy that home or keep on looking for another dream home. Game Theory Framework
What's the problem?
What are the factors?
Build a model.
Develop a plan by using model.
Develop a strategy. Benefits
Companies can enjoy greater success if they work together and promote quality among competitors.
Dysfunctional and poorly performing companies may not succeed and disappear.
Lower prices can occur because of competition between businesses.
New allies may be formed.
Better deals can be negotiated based on advantages of companies working together.
Incentives for employees or companies willing to work with other companies.
Bonuses and other incentives to entice, reward, or recruit top performers. The key link between neoclassical economics and game theory was and is rationality.
Neoclassical economics is based on the assumption that human beings are absolutely rational in their economic choices. The assumption is that each person maximizes her or his rewards - profits, incomes, or subjective benefits - in the circumstances that she or he faces. Game Theory
in Business Definition
Game theory attempts to explain the interactions of the game and predicts who will win the game.
It is the study of competition and coordination.
In business, those who have an interest in the company have different goals and their actions affect the actions of other stakeholders. Zero Sum Games
The concept of zero-sum games says that one person’s gain is exactly equal to the others lost.
For example: when you cut a pie, it has lost a slice, while the person eating that slice has gained the exact equal of what the pie lost.
Its like poker, each player puts in the same bet and the winner gains those bets of the losers.
The net change in total wealth among participants is zero; The wealth is just shifted from one to another. Game theory was intended to confront this problem: to provide a theory of economic and strategic behavior when people interact directly, rather than "through the market."
Game theory addresses the serious interactions using the metaphor of a game: in these interactions, the individual's choice is essentially a choice of strategy, and the outcome of the interaction depends on the strategies chosen by each of the participants. History
Game theory was founded in 1944 by mathematician John von Neumann and economist Oskar Morgenstern. They wrote the book "The Theory of Games and Economic Behavior". Works Cited
7 Easy Ways To Use Game Theory To Make Your Life Better." Business Insider. N.p., n.d. Web. 22 Feb. 2013.
American Experience | A Brilliant Madness | Special Features. (n.d.). PBS: Public Broadcasting Service. Retrieved from http://www.pbs.org/wgbh/amex/nash/sfeature/sf_dixit.html
Chronology of Game Theory. (n.d.). Economics and Finance - University of Canterbury - New Zealand. Retrieved from http://www.econ.canterbury.ac.nz/personal_pages/paul_walker/gt/hist.htm
Game Theory." Game Theory. N.p., n.d. Web. 22 Feb. 2013.
Game Theory - Economics. (n.d.). Netplaces. Retrieved from http://www.netplaces.com/economics/imperfectly-competitive-markets/game-theory.htm
Game Theory. (2010). Retrieved February 21, 2013, from http://faculty.lebow.drexel.edu/McCainR//top/eco/game/game-toc.html
Game Theory. [ONLINE] Available at: http://en.wikipedia.org/wiki/Game_theory. [Last Accessed February 13, 2012].
Introducing Game Theory – Good Math, Bad Math. (n.d.). ScienceBlogs - Where the world turns to talk about science. Retrieved from http://scienceblogs.com/goodmath/2008/03/19/introducting-game-theory/
Investopedia. (n.d.). Zero-Sum Game. Retrieved from http://www.investopedia.com/terms/z/zero sumgame.asp#axzz2LVsOFTqA
Levine, David K. (2011). What is Game Theory?. [ONLINE] Available at: http://levine.sscnet.ucla.edu/general/whatis.htm. [Last Accessed February 13, 2013].
Subramanian, D. (October 3, 2007). Game Theory. Retrieved from http://www.clear.rice.edu/comp440/handouts/GameTheory-6pp.pdf
Why is Game Theory useful in business? (n.d.). Investopedia – Educating the world about finance. Retrieved from http://www.investopedia.com/ask/answers/09/game-theory-business.asp#axzz2LgYyt7y2 Project 3 Team 1
Pamela Gibson Risks
Companies may be at a disadvantage due to hostility and increased negative competition.
Risk of losing because when one company gains, another will lose.
Could result in cheating and manipulation of data by competitors or employees to ensure the appearance of their success.
May promote conspiracy and fraud as companies attempt to control markets and hurt competitors.