The numbers do lie…
Business is all about numbers. Whether a person is switching to a new shampoo, or investing in a
growing start-up, he tries to make informed decisions. He looks at past success, the money the
brand has behind it, it’s earning potential and so on. More often than not however, the art of
winning a customer on investor lies not in the numbers, but how the numbers are perceived.
Enter Game Theory
.
Wikipedia defines game theory as "the study of mathematical models of conflict and cooperationbetween intelligent rational decision-makers". In simple words, it means: Game theory is a type ofscience that predicts future decision that any living, thinking thing makes.
Game theory has applications in several fields: mathematics, biology, economics… the list is endless.
A good example of the thought process that goes into game theory can be discussed by the
Prisoner’s Dilemma question:
Two members of a criminal gang are arrested and imprisoned. Each prisoner is in solitary
confinement with no means of communicating with the other. The prosecutors lack sufficient
evidence to convict the pair on the principal charge. They hope to get both sentenced to a year in
prison on a lesser charge. Simultaneously, the prosecutors offer each prisoner a bargain. Each
prisoner is given the opportunity either to: betray the other by testifying that the other committed
the crime, or to cooperate with the other by remaining silent. The offer is:
● If A and B each betray the other, each of them serves 2 years in prison
● If A betrays B but B remains silent, A will be set free and B will serve 3 years in prison (and
vice versa)
● If A and B both remain silent, both of them will only serve 1 year in prison (on the lesser
charge)
Participate with a partner. Think about what you are going to do in such a scenario. After making a
choice, ask what your partner chose to do. Discuss your choices. Are they the same? Why/ Why not?
Game theory tries to explain the choices you make. Using this, it is also possible to select the most
desirable options based on the game and the previous patterns of you and your opponents. You
might be asking yourself: How is this useful? What use can predicting my actions have? It’s simple:
Imagine you want to work on a start-up. You have taken the first step by making a product and
committing yourself to it. It is now important to know who your target audience is, what they are
looking for in a product, how much they will spend, what their spending patterns are, and so forth.
You must know what about your company will attract them, and what will make them hesitant to
putting their money in it. Using game theory, we can get the answers to all these questions. We can
predict the responses of employees, investors, customers and other people involved in the chain of
the product. That information can then be used to optimize your product, marketing strategies and
business model.
Game theory is something that is incredibly relevant to people who are serious about business. It
tells you what numbers tick and what numbers don’t, and while it can’t tell you what numbers
matter, or what part of a number matters, it can tell you if your customers think it is important or
not. Without it, you might as well guess the results.
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