Introducing Game Theory – Part 2

Some Analogies to Make it Easier to Understand

In my last blog post, I did a compare and contrast between game theory and game studies.  This post provides some analogies that hopefully makes game theory easier to understand.

I’ve been explaining game theory to colleagues for eight years.  Seven of those years, the explaining was to colleagues and board as a practitioner.  This last year, the explaining has been evangelizing as a strategy consultant to prospective clients.  With that experience, here are the best non-purist explanations…

Imagine you’re playing chess, but with N players rather than two.  The objective is to capture the king of every opponent.  That requires you to have an offensive strategy.  But each of your opponents will have their own offenses.  You re-validate your current understanding of every player’s strategy every time any player makes a move.  And you may change your entire strategy, or just a few moves, depending on the moves of others.

Game theory is a repeatable process of anticipating what others will do in order to achieve the best outcome for you.

Now, if you’re an engineer.  Here is another great explanation…

Imagine a set of vectors each having a force and direction.  That set of vectors will converge in a natural equilibrium.  That equilibrium can be computed mathematically, and therefore is predictable.

Sometimes I explain game theory using the popular chicken scene in the movie Rebel Without a Cause.  The game of chicken is in nearly every textbook on game theory as it is quite evident that the actions of both players are dependent on the other.

The Game of Chicken:  Two cars speeding toward each other on a one lane road.  Each player has two options – swerve or go straight.  If you swerve, you’re a coward.  If you go straight, you’re a hero.  There are four possible outcomes in this game.  One of those outcomes is particularly bad for both players.

Now imagine that you’re playing chicken, and your opponent shows up completely drunk, acting irrationally, and slurring bold explicative about of you going down.   Does this influence your behavior about swerving or going straight?  Yes.

The punch line…

Just like your adversary who showed up and acted drunk, good (credible) product positioning in your market can change the behavior of your competitors.

What is common in each of these three analogies i) capturing all the other kings; ii) the equilibrium of vectors; and iii) being the hero in the chicken game?  They are all a sequence of actions and reactions leading to a final outcome.   That final outcome is actually predictable by analyzing the sequencing.  Game theory is a methodology that helps to figure all that out.

Next, I plan to write about some recent examples in business where game theory was, or should have been applied.