Game Theory Implications in Business
1
Playing the Game
Game theory implications in business
Abhik Ghosh
19th July’09
©ABHIK GHOSH
In an economically contracting market-place, interactions between various parties to a transaction are increasing every single day. With numerous covenants guarding every deal, there is more to the market equation than simply the buyer-seller dynamic. Undoubtedly, in a perfect world, when the curtains are pulled down, and the facade is eroded, the buyer-seller dynamic is still supremely prevalent, but this sadly is not a perfect world. Thus, in business which essentially is a high stakes game, making the right decision keeping in mind the numerous variables in the equation is extremely important. Business unlike sports or war is not about winning at all costs. It is actually not about how well you play the game. Companies and organizations can succeed without requiring competitors to fail and at the same time, they can fail miserably no matter how well they played the game. We will in due course of this article, impress upon you the importance of the “GAME”. For now, assuming that the hypothesis of this so-called importance is proven, let us go over a concept which even 65 years after its origin, is yet to catch favour in day-to-day business. Game Theory came into existence in 1944 when mathematical genius John Von Neumann and economist Oskar Morgenstern published a book Theory of Games and Economic Behaviour. In this path breaking book, they distinguished broadly two types of games. One, in which the players interact according to certain “terms of engagement” or covenants as earlier mentioned. This we shall henceforth call “rule based games”. Two, in which players interact without any external factors/rules. This we shall call “free-wheeling games”. In rule based games, like Newton’s third law of motion, every action has a reaction. Not necessarily, an equal and opposite reaction, but a reaction nonetheless. Thus a smart player is one who evaluates how other
Playing the Game
Game theory implications in business
Abhik Ghosh
19th July’09
©ABHIK GHOSH
In an economically contracting market-place, interactions between various parties to a transaction are increasing every single day. With numerous covenants guarding every deal, there is more to the market equation than simply the buyer-seller dynamic. Undoubtedly, in a perfect world, when the curtains are pulled down, and the facade is eroded, the buyer-seller dynamic is still supremely prevalent, but this sadly is not a perfect world. Thus, in business which essentially is a high stakes game, making the right decision keeping in mind the numerous variables in the equation is extremely important. Business unlike sports or war is not about winning at all costs. It is actually not about how well you play the game. Companies and organizations can succeed without requiring competitors to fail and at the same time, they can fail miserably no matter how well they played the game. We will in due course of this article, impress upon you the importance of the “GAME”. For now, assuming that the hypothesis of this so-called importance is proven, let us go over a concept which even 65 years after its origin, is yet to catch favour in day-to-day business. Game Theory came into existence in 1944 when mathematical genius John Von Neumann and economist Oskar Morgenstern published a book Theory of Games and Economic Behaviour. In this path breaking book, they distinguished broadly two types of games. One, in which the players interact according to certain “terms of engagement” or covenants as earlier mentioned. This we shall henceforth call “rule based games”. Two, in which players interact without any external factors/rules. This we shall call “free-wheeling games”. In rule based games, like Newton’s third law of motion, every action has a reaction. Not necessarily, an equal and opposite reaction, but a reaction nonetheless. Thus a smart player is one who evaluates how other