Real World Game Theory Application
Link: http://business.financialpost.com/2013/02/27/putting-game-theory-into-real-world-practice/
This article describes how game theory is commonly applied when companies are identifying, analyzing, and trying to make real world strategic decisions that have consequences. The firm discussed in this article, a medium-sized company, is seeking advice using a game theory model, needs to make a choice: acquire a similar sized privately owned company with similar assets or forgo this acquisition altogether. Another possibility exists: a foreign firm may make an offer to acquire the comparable private company. Mergers and acquisitions, where multiple bidders and strategies are used, are ideal for game theory applications. All relevant information was assembled, organized, and put into an algorithm that models the firm’s possible decisions and consequences of such decisions. The analysis suggested “the optimal course of action and its payoffs” while “highlight[ing] opportunities for the firm to cooperate with foreign competitors and partner with third parties through…strategic alliances.” Applying game theory to this situation allowed for the firm’s CEO to gain insight into the company’s M&A strategy and how different negotiations might unfold.
Companies such as Microsoft and Chevron disclose that game theory analysis is valuable in assisting in making complex, risky decisions. On the contrary, a number of firms believe that game theory often makes a situation too complex, and look at solutions that are in many cases unrealistic. Game theory analysis should be used in conjunction with other, more common, decision making approaches. This will improve its validity as well as provide some statistical evidence as to why particular decisions listed by the algorithm should be reinforced or not. When using game theory, one must make assumptions. For example, it is assumed that all players are rational. This assumption alone provokes skeptics to claim that game theory in itself is unrealistic as every transaction is unique and nothing should be assumed; too many confounding variables can influence decision-making.
Game theory is something that should be applied to real world decisions, as it allows a broad and theoretical perspective regarding the consequences of potential decisions. Game theory should not be used in isolation, however. As mentioned in the article, using a game theory algorithm may be advantageous in identifying the best economical solutions that rely on many assumptions. However, because so many assumptions are made, game theory should be used with other decision-making techniques that take into account the financial value, psychical effects, environmental impacts, etc. In sum, this resource shows how successful companies, like Microsoft, properly apply game theory algorithms to map out responses to particular decisions.