**In this post, we’ll unpack all you need to know about Game Theory, defining exactly what it is, the rules, models, why understanding it is important, how to leverage it and more.**

**What Is Game Theory?**

Game Theory (GT) is a branch of social science that uses a mathematical framework to study strategic **decision making**.

**What Are The Rules?**

A ** strategic interaction** where players’ choices determine outcomes is referred to as a

**. Games can either be**

*game***(where players**

*cooperative**form binding commitments) or*

**can****(where players**

*non-cooperative**form binding commitments),*

**can’t***or*

**zero-sum***and can be analysed in*

**non-zero-sum***or*

**static (one-shot)***settings.*

**dynamic (repeated)*** Decision-makers* involved in a game are referred to as

*.*

**players**** Choices **are called

*. Moves can either be*

**moves****(where players take turns making their moves one after the other) or**

*sequential**(where players make their moves at the same time without knowing the other player’s choice).*

**simultaneous*** Plans of action *available to the players are referred to as

*.*

**strategies***resulting from the combination of strategies chosen by the players are known as*

**Outcomes***.*

**payoffs****Game Theory Models**

Three primary Game Theory models include ** Nash Equilibrium**, the

*and*

**Prisoner’s Dilemma****.**

*Dominant Strategy*** Nash Equilibrium** involves a scenario where no player can benefit by changing strategies while the other players keep theirs unchanged.

** Prisoner’s Dilemma** involves a scenario where two individuals might not cooperate, even if it appears that it is in their best interest to do so, because of mistrust or the inability to communicate.

** Dominant Strategy** is a strategy that is best for a player, regardless of the strategies chosen by other players.

**Deterrence & Compliance**

** Deterrence **involves strategies that

*opponents from taking*

**prevent***actions through*

**undesirable****or**

*threats***.**

*negative consequences*** Compliance **involves strategies that

*opponents to take*

**encourage***actions through*

**desired***or*

**incentives***.*

**positive rewards****Threats & Promises**

* Threats *are commitments to impose

*if an opponent takes an*

**negative consequences****action.**

*undesirable** Promises *are commitments to provide

*if an opponent takes a*

**positive rewards***action.*

**desirable****Game Theory Tips**

** Firstly**,

**and**

*look forward**.*

**reason backward**** Secondly**,

*use a*

**always***if you have one. If you don’t have a dominant strategy, but your rival does, then assume they will use it and choose your next best response accordingly.*

**dominant strategy**** Thirdly**,

**any**

*rule out**that are*

**strategies***and go on doing so successively.*

**never best responses**** Fourthly**, search all the cells of the game table for a pair of mutual best responses in the same cell, which is a Nash equilibrium of the game.

** Fifthly**, in a zero-sum game, if it is disadvantageous for your opponent to see your actual choice in advance, then you benefit by choosing at random from your available strategies. The proportions in your mix should be such that the opponent cannot exploit your choice by pursuing any particular strategy from the ones available to them.

**Why Understanding It Is Important**

Understanding Game Theory is essential because it applies to almost any situation involving strategic decision-making.

GT offers insights into the dynamics of competition and cooperation, helping individuals and organisations navigate their respective environments more effectively.

Using the principles of GT allows individuals to make more informed decisions and helps them to more effectively achieve their desired outcomes in both personal and professional contexts.

## How To Leverage Game Theory

There are three keys to leveraging Game Theory.

* Firstly*,

**the strategic environment of your decisions.**

*understand**,*

**Secondly***potential moves and countermoves.*

**identify****,**

*Thirdly**the best move given the expected behaviour of others.*

**executing**## Summary (TL;DR)

Game Theory is a framework used for analysing situations where individuals make decisions that are interdependent.

GT is essential because it provides insights into the dynamics of competition and cooperation. Thus, it allows individuals to make more informed decisions and helps them to more effectively achieve their desired outcomes.

The key to leveraging GT is firstly understanding the strategic environment of your decisions, secondly, identifying potential moves and countermoves and thirdly, executing the best move given the expected behaviour of others.