Basics of Strategic Game Theory for Managers

The main aim of a ‘Game Theory’ is to study the consequences of or find out what happens when self-interested parties or agents interact with each other. You should understand that the word ‘self-interested’ in the context of Game Theory means that the involved each party or agent has his own description of which states of the world he likes. This may even include good things happening to other agents.

At the same time, each party or agent strives to and acts to try to bring about these states of the world favourable to him. Therefore, in the context of Game Theory, ‘self-interested’ does not that the party or agent wants to cause harm to other parties or agents. It also does not mean that the parties or agents care only about themselves.

Game Theory is a crucial strategy that Managers as well as businesses should adopt for their success. Game theory can help you play your current game better. However, often its greatest value is to help players define new games. Game Theory asks the players to conduct an equilibrium analysis which is the determination of equilibrium points. Also, the reasoning used in Game Theory proposes that the players should discover this equilibrium through introspection which is an unnatural and difficult process to follow in practical situations.

Game Theory models propose that players engage in very subtle and complex reasoning. However, it has been found that in practical situations the decision makers are far less comprehensive analysts than these model players. The ‘Utility Theory’ is the most popular and dominant approach to help model a party’s or an agent’s interests. The ‘Utility Theory’ is a theoretical approach which helps to quantify a party’s or an agent’s degree of choice or preference across a set of available options or alternatives.