A primer in game theory can help you to understand the principles of game theory before you dig deep into utilizing the same in your daily managerial decisions. To do this, you will begin by following the rules of the game. Such rules serve to identify five key components: the players or decision makers, the actions they could possibly take, the information they have available, the probability of different possible outcomes, and all possible combinations of issues chosen by the players.
A game is characterized by understanding the correlation of three different sets. The action set establishes each player's actions. The payoff set establishes each player's payoff as a result of the actions taken by the players. The strategy set is the set of all achievable outcomes chosen by all the players when each has conditioned their course of action on the information they have available. Each player chooses their strategy based on the actions of the other players. Your objective in understanding game theory is to be able to predict other players' choices when confronted with strategic situations. You will find this to be difficult because no player can make their choice independently of what other players decide. Each player needs to know what the other players will do, to make a decision that will result in the best possible outcome.
The interdependence of each player's strategy reveals the nature of a game. The two types of strategic interdependence are sequential and simultaneous. A sequential game is one in which players move in sequence, one after the other. In this way, each player knows the other players' prior actions. In a simultaneous game, the players all act at the same time while unaware of the other players' actions.
Strategic thinking in a sequential game requires forward thinking. You want to anticipate how the other player will respond to your action and plan accordingly. You will want to put yourself in the mindset of the other player. You will use their logic and reasoning, rather than your own. That will help you determine your best choice in each moment.
Strategic thinking in a simultaneous game requires circular reasoning. Each player acts at the same time, unaware of the other players' actions. However, each player knows that the other players are all similarly aware. Circular reasoning tells you "I know that he knows that I know…". In this way, you must put yourself in the mindset of all other players to assume the outcome. Your own best action should be considered when predicting these outcomes.
You can conclude such circular reasoning by using a concept of balance developed by John Nash called the Nash equilibrium. You determine which set of choices for each player is best for them when all others play their best strategies. To put it another way, you will choose your best response based on what you have determined will be the other players' best actions.
You will find the Nash equilibrium to be an insufficient conclusion for circular reasoning in many simultaneous games. Some games will have a vast amount of such equilibrium, while some games will not have any at all. However, despite such imperfection, the concept has proven to be very useful in determining various strategic interactions.
An understanding of game theory and the ability to anticipate the responses of your competition is vital. You will benefit greatly from the ability to use strategic thinking to enable your business to succeed. Successful business managers realize it is an art that not only requires knowledge and understanding but practice and discipline as well.