The mathematician John Von Neumann and economist Oskar Morgenstern are credited with the development of game theory in the 1940s. Since then, many different scholars and researchers have developed it further.
Today, it’s used in a variety of professional fields, such as psychology, politics, business and biology. But thankfully, you don’t need a degree to use game theory in your own life, as it can be used to improve the outcome of many common scenarios such as card games, asking for a pay rise or saving money on a purchase.
In this article, we’ll take a look at what game theory is and how an average person can use it in real-life scenarios to better their life.
What is Game Theory
In the Oxford Dictionary, game theory is defined as:
‘’The branch of mathematics concerned with the analysis of strategies for dealing with competitive situations where the outcome of a participant’s choice of action depends critically on the actions of other participants. Game theory has been applied to contexts in war, business, and biology.’’
In plain English, this means that game theory is a mathematical theory about how decisions are made and how one person’s decision can affect another.
It looks at how people interact and make decisions in situations that could be friendly or competitive to minimise losses and maximise benefits.
So, whether it’s playing a game of poker, negotiating with a friend about where to have lunch or interacting in a group project, game theory is shaping the outcome.
Game Theory Example
One of the most well-known examples of game theory is the Prisoners Dilemma. This is how it works:
Prisoner’s Dilemma
Consider two criminals that have been arrested for robbing a bank. Officials don’t have any concrete evidence to convict either of them.
Each prisoner is taken from their cell and questioned separately and they are not allowed to interact with each other.
They are both offered the following options:
- Choose to confess or remain silent
- If both confess, they will each get a three-year prison sentence
- If prisoner 1 confesses and prisoner 2 stays quiet, prisoner 1 will be sentenced to one year and prisoner 2, five years
- If prisoner 2 confesses and prisoner 1 stays quiet, prisoner 2 will get sentenced to one year and prisoner 1, five years
- If both refuse to confess, each will be sentenced to two years in prison
The best strategy for both prisoners is to stay quiet and not confess.
But, without knowing what the other prisoner will do, both will likely confess and get a three-year sentence.
Key Takeaways
- When individuals in a group act in their own self-interest, this may not lead to the optimal outcome
How to Use Game Theory in Everyday Situations
It’s likely you’ve used game theory in real life and not even realised. However, by being more aware of it, you can use the principles as a practical tool to achieve goals and make better decisions in every area of your life.
A few tips to make game theory work for you in real life include; identifying when you’re in a strategic situation, understanding your opponents (eg; strengths and weaknesses) and thinking ahead to understand how you can gain the most benefit.
Here are a few common situations where game theory can be applied.
Playing Card Games
Game theory can be applied when playing various card games. Using it, you can analyse each game and understand the rules and boundaries to work out the best strategy.
For example, game theory is a useful tool when learning new how to play Baccarat. While it is a game of luck, by applying the right Baccarat strategies, such as how much to bet and what bets to choose, you may have a better chance of getting onto a winning trajectory.
Regarding poker, game theory can be used to make better decisions regarding play and to decipher the optimal bluffing strategy. In practical terms, understanding game theory in poker will improve your ability to make strategic decisions and better the outcome.
Securing a New Job
An instance of game theory in day to day life is during a job search. Using game theory, a strategic approach can be devised to maximise your chances of getting hired.
To start, do your homework to understand the company, hiring manager and other candidates strategies and motivations.
Next, signal your value in the interview, to show that you have what they want in an employee. Essentially, you are using game theory to turn the job interview process to your advantage.
Negotiating a Salary Raise
Negotiations are another area of everyday life where you can use game theory to produce a better outcome.
But remember, game theory is not just about winning. Like we saw in the prisoner’s dilemma, a strategic approach that considers both sides is often more beneficial.
For example, when you want a salary raise, it’ll pay to propose a deal that benefits not only you, but, your boss and the company you work for. By taking others into consideration, you’re increasing the chances of getting the raise you want.
In Auctions
Auctions for houses and art are examples of when game theory comes into play. In order to be successful and buy an item at the lowest possible price, bidders need to take into account the value of the item and employ strategic timing when submitting bids.
They also need to consider what other interested parties will do at the auction. This understanding helps to devise a strategy that takes into account different people’s actions and reactions.
Final Thoughts on Game Theory in Daily Life
Anyone can use game theory principles in real life to maximise their benefit in strategic situations. Whether it’s playing card games or negotiating for a salary raise with your employer, understanding game theory will help you to make better decisions, boost achievements and be more successful.
