A Beautiful Strategy: John Nash's 'Game Theory' Explained

Hindustan Times (New Delhi, India), May 26, 2015 | Go to article overview

A Beautiful Strategy: John Nash's 'Game Theory' Explained


India, May 25 -- John Nash, 86, the brilliant mathematician who won the Nobel in economics and whose life inspired a book and Oscar-winning flick 'A Beautiful Mind', died in a car crash on Sunday. Nash's contribution helped 'Game Theory' gain popularity, leading to its widespread use by firms as mainstream corporate strategy.

What is game theory?

Game theory is a branch of mathematical economics first theorised by Jon Von Neumann in the 1930s. It involves the principles of probability in a multi-player world where each player (agent, firm etc) attaches a certain probability to the other players' behaviour to an action he himself undertakes.

Which are the areas of application of game theory?

Game theory is applied in several areas of current research including space sciences, engineering, stock markets, auctions, multi-firm bids in corporate mergers and acquisitions, and even in geo-political diplomatic strategies of war and peace.

How does it work?

Game theory has several branches: Cooperative Games, Non-Cooperative Games, Strategic Games etc. Its work can be best explained in the context of auctions.

An auction is a non-cooperative game involving several players. Each player assumes that the other players would react in a certain way for every action of his.

A game of chess explains this more clearly. A chess player bases his moves assuming that his opponent would respond in a particular way and vice-versa. The strategies and tactics are based on these assumptions. In mathematics, these are called as "mixed probabilities" where the assumptions are based on incomplete information on opponents.

Are there any specific examples that can be cited that has used game theoretic tools as mainstream corporate strategy?

Yes there are. The acquisition of a European steel maker by an Indian company (Tata Steel) in 2007 reflects the principles of a non-cooperative game theoretic strategy. After the bids were submitted, both the Indian company and its rival, a South American firm, were asked to participate in an auction to win the rights of ownership of the target company. As the auction began and reached the ninth round, the Indian company announced the tactic saying that it would bid five pence more than whatever the South American rival bids.

The strategy was based on the probability that South American company would not bid beyond the certain point as the Indian company's bid would anyway be higher by five pence than its rival's. This move was based on the assumption that the probability of the rival continuing to bid beyond a certain level would be negligible. …

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