Do you wonder how leaders can make constructive decisions in complex situations? It is because they conduct strategic analysis to make informed decisions.
Economists use different methods to analyze situations and make decisions that benefit their companies.
A widely used method of conducting analyses in economics is through game theory. If you wonder what is game theory in behavioral economics and how it helps businesses make informed decisions, head to Superprof. Superprof hosts world-class tutors who can assist in learning this subject from scratch. Hire an online private tutor from Superprof today to learn more about Game theory.
Continue reading to learn more about it and why it is important.
What Is Game Theory?
Game theory is a branch of mathematics that comprises strategic tools to analyze and develop viable solutions. It is the study of how and why people make decisions. The game theory includes players whose fate depends on all other players' decisions. Therefore, players should consider other participants' choices while making a decision.
The concept of game theory was developed by American mathematician John von Neumann and his colleague Oskar Morgenstern. They coined this idea in 1994 to solve decision-making and outcome prediction problems in economics.
Since then, economists have extensively used game theory to understand oligopoly firm behavior. Game theory is applied in economics and management to predict the course of action of two or more companies. It foretells factors like pricing, product launches, and more.
Let's look at two popular applications of game theory in economics;
The Prisoner's Dilemma
This is when two players (prisoners) are interrogated separately to confess to a crime they committed together. There are possibilities that both or none of the players will confess to the crime. Additionally, there are also chances that one party will and the other party will not confess to the crime. There are different outcomes to every action.
Assuming that both the prisoners would answer out of self-interest, there are chances that there will be less than optimal outcomes for both of them. This concept can be applied to businesses that are competing for a product. If one company changes its price, the other will be forced to reduce profits for both companies.
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The Centipede Game
In this game, each player leaves a sum of money that keeps coming back to them. The sum will keep increasing with every turn if they do not take it. However, even if one person takes the sum, all the other players will receive less than what they had contributed.
In business, a similar scenario is created where two rival entities come together and trust each other. The motive of this strategy requires them to give up their self-interest at the moment to gain more significant dividends in the end.
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What Is The Importance Of Game Theory?
Game theory in behavioral economics is essential for various reasons. Let's see some of them;
1. Aids In Predicting Possible Outcomes
The principal aim of game theories is to predict possible outcomes for a business. Companies can accordingly plan their course of action after reviewing the potential results of different situations. It cuts short the time and effort as well as offers a more systemized way of running the business.
2. Businesses Can Prepare Before Time
Game theories enlighten companies about what will happen when they undergo a specific plan.
This gives companies the time to understand and assess which outcome would be favorable. Additionally, it provides businesses the leverage to prepare for the expected outcome before time.
3. Averts Possible Risks and Threats
Game theories prevent dangers that can wreck your business by running strategic analyses to assess risks. Additionally, they warn you of the consequences before time so that you can prepare to avert or face the danger.
4. Improves Decision Making
One of the greatest benefits of using game theories in businesses is its phenomenal decision-making skills. This venture combines several disciplines, including mathematics, psychology, and philosophy. Business leaders no longer have to worry about the consequences of their business strategies and the risks associated with them. A strategic analysis offers a number of favorable strategies and solutions and requires you to pick a viable option for your company. It helps mitigate risks, makes you better equipped to face challenges, and helps polish your decision-making skills.
5. Helps To Develop Appropriate Business Strategies
Game theories ensure that you pick the best business strategies to take your business to phenomenal heights by conducting in-depth research and tactical analysis that provide top-tier results.
6. Identifies Which Competitor Is Or Is Not Reliable
Game theories use different scenarios like 'the Centipede game.' It helps in identifying which competitor can be helpful to you so that you invest your time, resources, and efforts into the right company. Moreover, it will also highlight which competitors are not worthy of your trust, thereby saving you from significant detriments.
How Is Game Theory Used In Game Theory?
Organizations widely use game theory to up their business game. Here are some areas where you can use game theory as a strategic tool in your business;
1. Bargaining And Negotiations In The Company
There are several instances of collective bargaining and negotiations between different participants or parties in a company. For example, there can be a negotiation between the management and the employees on wage increments. You can use game theory to discover a constructive solution that considers the welfare of both parties.
2. Discussion and Decisions For New Launches
Several concerns impede our minds before we launch new products. Businesses often wonder if there are any first-mover advantages, whether they should enter or exit the market, or what defense they should adopt with the release of competitors' new products. Game theories can be used when it's time to launch new products. After strategic analysis, game theories help decide which outcome would be viable for your company.
3. Product Pricing Decisions
There are continuous debates in markets regarding fixing, increasing, or decreasing the price of a product. Game theories assess the outcome of keeping a respective price that offers the maximum benefit to all the parties involved.
What Are The Best Ways To Learn About Game Theory?
After learning the extensive benefits of game theory, it is natural to be fascinated by this subject and want to learn it. There are many ways to learn game theories. For instance, you can opt for a professional school, enroll in a game theory course, or self-learn it by reading books.
The best way to learn game theory is by hiring an online private tutor. It is a challenging subject that requires adequate attention and hard work. A private tutor will give you individual attention so that you can efficiently grasp game theory concepts and understand its practical applications.
Moreover, you can have a one-on-one private session with your online private tutor. It will give rise to a more interactive and practical session. You can ask as many questions as you like.
There are several benefits of learning the application of game theory with a private tutor as compared to traditional learning methods. Here is how;
| Traditional Learning | Online Private Tutoring |
|---|---|
| No individual attention | Full individual attention |
| Expensive | Affordable |
| Fixed and scheduled | Flexible |
| Less interactive | More interactive |
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