Why You Need to Care About Game Theory

With the recent death of Nobel-winning economist and mathematician John Nash, people are suddenly starting to talk about game theory again.

In particular, Nash is known for developing the Nash equilibrium, which Chang describes as “a stable state in which no player can gain advantage through a unilateral change of strategy assuming the others do not change what they are doing.”  

Nash’s work considered situations other than one person wins and one person loses. It also covers situations where everyone wins—or everyone loses. Nash’s work also considers possibilities such that people wouldn’t act rationally, and that people wouldn’t necessarily make the best decisions possible.

While applications of the Nash Equilibrium are usually thought of in terms of politics, it comes up in business as well. Pricing of goods and supplies, the wages companies pay, competitive bidding.

For example, when the U.S. government in 1994 sold off large portions of the electromagnetic spectrum to commercial users, it used Nash’s equilibrium theory to design a multiple-round procedure to maximize both the revenues to the government and the utility of the purchased wavelengths to the respective buyers. “The result was highly successful, bringing more than $10bn to the government while guaranteeing an efficient allocation of resources.”

In fact, Nash equilibria are relevant to many types of government policy decisions and business acquisitions.

Ultimately game theory involves putting yourself in the other person’s shoes. “You have to be able to assess the benefits that each party might gain and the costs that they will have to incur as a result of any possible action that they might choose to undertake.”

Ref: https://www.laserfiche.com/ecmblog/why-you-need-to-care-about-game-theory/#