What most business leaders try to do is outsmart their rivals to achieve their goals. Broadly speaking, this involves what economists and mathematicians call game theory. The Encyclopaedia Britannica describes game theory as a branch of applied mathematics used to analyse situations in which there is an interplay between parties that may have similar, opposed or mixed interests. In a typical game, decision-making 'players' each have their own goals, and try to outsmart one another by anticipating each other's decisions. How the game is finally resolved depends on the players' decisions.
Game theory can act as a guide for players and a tool for predicting the outcome.
In economics, it has been used in attempts to model existing human behaviour, for example to better understand market or pricing dynamics. Using game theory, auctions can be designed to fulfil specific objectives. This was used to great effect in the recent auction of 3G wireless licences, where the aim was to maximise government revenue. It is also used extensively in the stock market, where traders try to predict the market to optimise their gains. All rights reserved.