4.12 Game Theory

And now for something completely different, Game Theory.  Game Theory is a branch of mathematics and one thing it leads to is decision making.  The idea is to look at different scenarios, identify the possible outcomes, and select that which maximizes utility or minimizes loss.

The classic example of this is the Prisoner’s Dilemma.  You have probably seen this being used in TV shows or movies.  Watch this short video to see how it leads to decision making.

You might wonder how a business might apply this.  Think of two gas stations across the street from each other.  They each have the choice to raise, lower, or keep prices the same.  What do they do?  You can create a decision matrix (table) like the one in the video to determine their optimal choice.  Hint: they will both want to lower prices.

This has been explicitly used by businesses.  Recent discussions about the possibility of the U.S. raising tariffs on Chinese goods has businesses using Game Theory to evaluate their options.