💭 Game Theory: Solving Geo-Political Tensions?

Wondering how world leaders and businesses make tough decisions? The answer is Game Theory. (Reading Time: 3 mins)

The Russia v/s Ukraine situation has got all of us on the edge of our seats.

Nobody knows what major move the world powers are going to make next and how Russia will react to it.

And most importantly, how disastrous will the situation be for all of us?

Will this battle ultimately lead to a nuclear war?

Well, there is one way to predict the answer to all of these questions.

Game Theory.

What Is Game Theory?

Life is a multi-player game. Everything is connected. Every decision has a consequence. And if you think hard enough, you can predict decisions, you can predict consequences and then rule the game. 

That's what Game Theory does. 

Let us explain using one of the most popular examples of Game Theory: Prisoner's Dilemma.

Let's assume there are two prisoners who have been arrested for a crime. The police have no evidence against them. So, they're both interrogated and asked to confess for a lesser sentence.

Now, there are four consequences:

A: None will confess, and they'll both get a lighter sentence or might even go free.

B. Prisoner 1 will confess and get a lesser sentence, while Prisoner 2 will get a harsher sentence.

C. Prisoner 2 will confess and Prisoner 1 will get a harsher sentence.

D. They'll both confess and get a not-so-harsh sentence.

The trick here is each prisoner has to anticipate what the other is going to do. Their futures depend on each other. If they both anticipate that the other will not confess, it's a win-win. But if one of them chooses to believe the other and is betrayed, they get a harsher sentence. 

Like the two prisoners, economists, strategists, and world leaders are all trying to anticipate each other's next move to understand what they should do next regarding the Russia-Ukraine crisis. They are all trying to use this theory to figure out the winning move. The whole world has turned into a giant poker table, and there is a lot at stake. 

Here's Bloomberg's Game Theory analysis of the situation:

And this whole scenario got us thinking about where else in our daily lives could we use Game Theory to make the best possible decisions. 

Game Theory Use Cases

Well, there are several economic scenarios that are currently playing out where Game Theory could be of tremendous help. 

For instance, India and the US could use Game Theory to finally decide when to raise interest rates (raising interest rates has become important to control the rising inflation) and by how much. 

Several businesses have been forced to raise prices, thanks to this inflation. 

Now, raising prices is always a risk. It can put customers off and send them to competitors. 

So, these businesses could (and probably are) use Game Theory to analyse their competitors' strategies and whether or not raising prices would be a good idea and/or what the new price should be. 

But that's not all. Game Theory also holds a lot of benefits for common folks like us.

In our lives, we have to make several negotiations: be it salary negotiations, business contracts or even when buying real estate.

Here's where we can use Game Theory to make the right choices.

Let's assume, you're looking for a new job and your new employer offers you a salary of Rs. 50,000. Now, you already earn Rs. 40,000, so you want Rs. 60,000 from your new job. 

Now, being firm on this amount could cause you to lose the offer. 

So, you need to analyse how badly the new employer needs you, if your old employer will be ready to raise your existing salary to retain you, and many such factors while negotiating. This will help you get the best salary that you can and not lose any job prospects. 

Plus, game theory can also help you analyse your investments. By understanding the market behaviour and other people's sentiments, you can take a call on when you should buy a particular stock or sell it.

But obviously, this theory isn't foolproof. After all, it's a theory and it depends on your analysis of how other players are going to behave.

So, it doesn't guarantee that you'll make the best decision.

Let us know what other use cases you think Game Theory has on Twitter.

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