Game Theory
Every strategic decision is a game — the outcome depends not just on what you do, but on what others do simultaneously.
Game theory is the mathematics of strategic interaction. It predicts where rational players stabilise and reveals where incentive misalignment creates exploitable gaps.
Core Concepts
| Concept | Definition | When It Matters |
|---|---|---|
| Nash Equilibrium | No player benefits from changing strategy alone | Predicting where markets and competitions settle |
| Dominant Strategy | Best move regardless of opponents' actions | Simplifying complex decisions to one clear action |
| Zero-Sum | One player's gain equals another's loss | Fixed-resource competition — attention, market share |
| Non-Zero-Sum | Total value can grow or shrink | Collaboration, trade, platform economics |
| Bayesian Games | Players hold private information about others | Auctions, hiring, negotiations with hidden types |
| Shapley Value | Fair payoff split based on marginal contribution | Coalition building, revenue splits, team compensation |
Information Types
| Type | What Players Know | Example |
|---|---|---|
| Complete | All strategies and payoffs visible | Chess |
| Imperfect | Actions hidden, rules and payoffs known | Poker |
| Incomplete | Types, strategies, or payoffs unknown | Negotiations, market entry |
Incomplete information creates space for signaling (costly actions that reveal type) and screening (mechanisms that sort players).
Classic Dilemmas
| Dilemma | Structure | Lesson |
|---|---|---|
| Prisoner's Dilemma | Defection dominates, but mutual cooperation beats mutual defection | Trust requires repeated play or enforceable agreements |
| Tragedy of the Commons | Individual incentive depletes shared resource | Solve with property rights, regulation, or enforcement |
| Coordination Game | Multiple equilibria, players prefer different ones | Schelling points and consensus resolve deadlock |
Application
| Domain | How Game Theory Applies |
|---|---|
| Business Strategy | Find the Nash equilibrium in pricing and positioning before competitors do |
| Negotiation | Change the game structure, not just your moves — BATNA as credible threat |
| Mechanism Design | Reverse-engineer rules so self-interest yields desired outcomes |
| Predictions | Model other players' incentives, not just your own position |
| Game Design | Escape velocity requires non-zero-sum architecture |
Practitioner Loop
- Identify the game — players, strategies, payoffs
- Find the equilibrium — where does it stabilise without intervention?
- Check for dilemmas — are individual incentives misaligned with collective outcomes?
- Design or exploit — change the rules (mechanism design) or move first
Context
- Decisions — The framework game theory sharpens
- Business Strategy — Competitive positioning as game structure
- Negotiation — Applied game theory with humans
- Game Design — Engineering incentive structures into play
- Predictions — Modelling what others will do next
- Value Consensus — How coordination games resolve