Game theory

game theory example

Change is said to be the only certain thing. Adapting to new circumstances is the only way entrepreneurs can survive and thrive. The speed of change is accelerating which necessitates constant rethinking of our strategy.

We make decisions every day and despite geographical distance, they affect everyone, because we don't live independently from each other. There are positive and negative effects that our choices create. Everyone has a certain agenda and changes in one beget changes in another. Knowing what other people have decided already changes the way we will determine our strategy based on the current information and environment.

Game theory makes us aware of this fact. It shows us what happens at the intersection of strategies and whether competition or collaboration is more beneficial for the participants. In this example, company A adjusts its strategy based on what company B does and vice versa. Here the numbers might indicate the potential profitability of A and B, should they decide to develop a certain product. This is a rather simplified view, but it illustrates well the idea that no decision lives in a vacuum. What has worked before might no longer be suitable. A Nash equilibrium is the combination of strategies, such that no player would feel tempted to further change its strategy. In other words, where everyone chooses the best response based on what the other side does. By this definition, we could expect that companies would naturally try to operate from their equilibrium, especially in the long term, as this would give them the stability to pursue their goals with undivided attention. Constantly changing strategy can be a waste, even if this can be beneficial in the short term. We can also see why sometimes cooperation can be mutually beneficial even for competitors.

Startups may also need to change their initial idea or business model multiple times until they find what works best for them. In a sense, this would be some kind of equilibrium, based on what other market participants are already doing.

If you want to learn more about game theory, you can watch the video series "Game Theory 101" by William Spaniel on YouTube.

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