Game theory is an interesting subject and one that can be applied to everyday life. There are many examples in today’s world that will show you how game theory works, for good or bad.
According to experts, these are some real-life examples where people used this strategy successfully—or not so much.
Game theory’s real power is in its ability to analyze incentives and decision-making.
- Statistical analyses of a situation will help you understand the likelihood of different events controlled by chance.
- Traditional economics will give you a clear picture of what a rational, self-interested actor with perfect information is likely to do.
- Game theory operates in the space between these two extremes by analyzing the choices people are likely to make in a given situation.
Related: 19 Best Game Theory Books
One of the most useful applications of game theory is in politics
Political parties in the United States are rarely a perfect match for a given voter’s political preferences. Even people who think of themselves as very conservative or very liberal have some idiosyncrasies in their beliefs.
We can use game theory to predict not only what voters are likely to do when confronted with imperfect choices between two parties but also how advertising, news coverage, other elections, and the relative importance of different issues all factor into a voter’s decision-making.
It can also be applied to the behavior of candidates and political parties themselves.
Predictor of the behavior of consumers and investors in any number of fields
Game theory can also be a great predictor of the behavior of consumers and investors in any number of fields. In my line of work, higher education choices are a great example.
The more people pursue college degrees, the less value these degrees have as a signal of work-readiness.
If we view prospective college students as players trying to “win” by earning a valuable credential at a good price, we should expect to see savvy players looking for advantages in the form of less-expensive degrees and other career paths.
This is, of course, complicated by other incentives related to social class and family expectations, but we can use this information to get a better sense of the education market in the coming years. At some point, the value of college degrees is going to drive down enrollment.
Game theory can be used to explain past events and situations and predict future actions by players
The best use of game theory is to find the best solution from the best choices by analyzing the costs and benefits to each participant. It can be used in business, psychology, biology, economics, political science, computers, etc.
The theory can be used to explain past events and situations and predict future actions by players.
Business managers can use game theory to predict their competitors’ strategic planning or thought processes. It is a powerful tool for predicting the outcome of interactions between participants or competitors where one’s reaction is dependent on the actions of others.
Here are some examples:
Parties’ collective bargaining
Game theory is used extensively in various forms of collective bargaining and negotiation.
For instance, during a strike or lockout, unions and management negotiate to raise wages. It is possible to maximize the welfare of both workers and control by using game theory to arrive at the optimal solution.
Game theory is also used in salary negotiations. Negotiations with suppliers, compensation, or incentive discussions between management and suppliers or business partners use game theory.
New product decisions
Businesses use game theory to decide whether or not to launch a new product into the market. A businessperson can use game theory to understand the first-mover advantage, competitor moves related to new products, and defensive strategies.
Similarly, game theory is used to decide whether to enter or exit a new market.
Game theory is also widely used to determine consumer and retailer pricing strategies. Retailers compete for customer market share by offering attractive discounts on specific goods to increase sales of complementary goods.
The offseason, i.e., the off-summer or off-winter season, is when vendors or retailers offer beautiful sales on a particular stock of clothes to attract maximum customers. Retailers and consumers are the leading players in this game. Consumers want the best deal in terms of discount and variety, while retailers use the best pricing strategy.
Founder, The Stock Dork
Both the rise and fall of Bitcoin are consequences of game theory
Everybody uses game theory even if they don’t know a thing about it. In fact, many of our everyday decisions are textbook cases of it, including doing X or Y not because we think it’s right but because we assume that everybody else will do it, thus gaining a competitive edge over us.
Stock trading is just one well-known example, but there is something even more drastic and volatile: crypto trading.
Say Peter wants to buy Bitcoin. The first thing he’ll do is observe its recent fluctuations – that is, presumably objective circumstances that are meant to inform his buying decision. The fact that the price is just now going through the roof means that a record number of people are buying Bitcoin and hoping to profit from it.
But then, Elon Musk burns a tweet criticizing Bitcoin. People panic, and the coin takes a nosedive within mere minutes. How’s that possible? Because everybody’s starting to sell, anticipating that that’s exactly what everyone else will do.
So, both the rise and fall of Bitcoin are consequences of game theory. But so is Peter’s personal gain or loss.
In other words, he profited or lost precisely because he strategized and tried to anticipate other players’ actions. The only person who had some real agency in this game was Elon Musk. But chances are he also played by game theory, factoring other people’s moves into his decision.
The bottom line? Game theory doesn’t necessarily make you a winner. Much like with anything else, you’ll win some, lose some. If you’re wise and temperate enough, your gains will be somewhat bigger than your losses at the end of the day. But you won’t be able to game the system to your advantage.
Brian Gawor, CFRE
Vice President for Research, RNL
Participation campaigns fueled by matches and challenges from big donors
In donation campaigns, you often have to choose between a ‘donors’ or ‘dollars’ goal – whether you want to emphasize total people participating or getting to a specific amount. We’ve found, across thousands of charitable crowdfunding campaigns in the ScaleFunder platform, that ‘donor goal’ campaigns raise more money, on average.
Why might this be? Well, it’s hard to think of yourself as a percentage of a dollar. But supporters can see themselves as ‘the next donor.’ And seeing a group of peers respond – in any amount – really fuels the bandwagon effect. As a result, participation-based campaigns often raise more money.
Big donations are powerful, especially for increasing confidence in meeting the goal. But they can also serve to make average donors feel less impactful. So, participation campaigns fueled by matches and challenges from big donors are really effective in getting many people to take action.
Game theory in real estate negotiations
Even if you aren’t aware of it, game theory is frequently used in real estate transactions. In real estate talks, the majority of negotiating moves are already known, making the game a little clearer than in other scenarios.
In multi-offer transactions, however, the situation is drastically different.
You have three options if you have submitted a bid and the real estate agent subsequently informs you that you are in a multi-offer situation. You have the option of keeping your previous offer, withdrawing it, or increasing your price.
Because the winner of the bid will almost certainly have to overbid to win, the latter option is required to win. Then, to win the bid on the house, you should bid exactly the amount you thought it would require. If someone outbids you and wins, you have done your homework and calculated that you made the best decision.
In other words, even if you lost, you did everything perfectly and should not be disappointed that your bid did not win because you made no mistakes during the process.
Director of Marketing, SEO Blog
A great example of game theory in real life is the way we play monopoly
In this game, we take our turns to move our token, and once we landed on the box, we were instructed to either pay rent, pay the bill, buy the land, or if you are lucky, you end up taking a chance card.
As the game goes on, you need to use your negotiation and people skills to win the game. You must also strategize the decisions you will take whenever you land in a certain box.
This goes the same with our daily lives; we strategize before we decide and take our chances to achieve a certain goal. We use our people skills when we interact with people and use our negotiating skills to achieve what we want.
Related: 17 Best Negotiation Books
Just like in monopoly, you should both have the skills and luck to win.
Owner, Dallas McLaughlin LLC
The primary rule of game theory is that it’s dependent on all players making rational decisions
I personally believe that one of the greatest myths in game theory is that game theory works in everyday life. Can it, though? Certainly.
However, whether in non-cooperative or co-operative games, the primary rule of game theory is that it is dependent on all players making rational decisions. But, as soon as humans are involved and real-life stakes are at risk, human emotions are introduced into the game, often irrationally, voiding the game theory decision-making process before it even starts.
Maybe this is why it’s a theory after all.
Frequently Asked Questions
Is Game Theory only for experts and mathematicians?
No, Game Theory is not just for experts and mathematicians. Although some aspects of Game Theory can be complex and require advanced mathematical knowledge, many of the core concepts and applications can be understood by anyone.
In fact, Game Theory can be applied in everyday situations, such as negotiations, social dilemmas, and personal relationships.
Many online resources, such as books, courses, and podcasts, provide accessible and informative introductions to Game Theory. There are also interactive activities and simulations that allow you to practice and apply the concepts of Game Theory in fun and engaging ways.
By learning the fundamentals of game theory, you can become a more strategic thinker and a better decision-maker in your personal and professional life, regardless of your background or expertise.
Are there limits to Game Theory?
Assumptions: Game theory relies on certain assumptions about human behavior and rationality. However, these assumptions are not always true in real-world situations. For example, people do not always act rationally or have incomplete information about the game.
Complexity: Games can be very complex, especially when many players and strategies are involved. Analyzing these games can be difficult and time-consuming, and there is not always a clear solution.
Ethical considerations: Game theory does not consider ethical considerations such as fairness, justice, and morality. In some cases, the optimal strategy may be unethical or illegal from a game theory perspective.
How can I learn more about Game Theory?
Through books: There are many excellent books on game theory, including “Game Theory: An Introduction” by Steven Tadelis, “Thinking Strategically” by Avinash Dixit and Barry Nalebuff, and “The Evolution of Cooperation” by Robert Axelrod.
Online Courses: There are numerous online courses on game theory, including the course “Game Theory” by Matthew O. Jackson at Coursera and the “Introduction to Game Theory” course by Yiling Chen at Stanford.
Conferences and Workshops: Many conferences and workshops on game theory bring together researchers and practitioners to share their latest findings and applications.
Game Theory Software: There are many software packages available for game analysis and modeling, including the open-source software packages GAMBIT and GamePy.
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