I’ll get this opinion out right from the start: I don’t think Game Theory is very applicable to real world strategic planning and/or strategy testing. Like most knowledge labeling from Higher Education, this is interesting inside of a lab. Basic game theory is fun, and interesting to think about, but isn’t very usable for corporate planning. Once you get into more advanced game theory such as Nash Equiquilibrium, this becomes exceptionally useful when economics tries to predict behavior. But this is where I ‘go off the rails’ a little. I personally get frustrated with predicting human behavior. Don’t get me started on AI. Let me explain.
There are two elephants in the room with game theory. Game Theory assumes the following: 1) Human behavior is reasonable and predictable resulting in ‘rational and predictable behavior’ and 2) the assumption that all parties have equal information that has equal interpretation. I’m sorry, but c’mon! Since when are humans predictable and rational and since when does anyone not bring their experiences and bias’ into any situation.
In 1979, researchers Kahneman and Tversky wrote Prospect Theory: An Analysis of Decision Under Risk. This looked at the impact of physiology on decision making. It’s an amazingly interesting piece to read (a little thick though). Daniel Kahneman won a Nobel Memorial Prize in Economics for his work developing Prospect Theory. Incredibly interesting stuff that will pretty much make you raise your arms up and say, “Oh man, then who knows what to do.” Absolutely right… we can only take an experienced mix of theory, experience, and tactics and do your best with what you think should be done (you can also gamify your strategy to see what happens).
Back to game theory: Again, I’m not a huge fan. It’s interesting and fun to think about. A little workout for the brain, but I see only a small spot for it in strategic development and implementation. As someone who has created and implemented strategy, I’ve yet to see anyone or any company be rational and predictable. – WPH