What is a Games Theory? (Management)

Games Theory (management)

Games theory was developed by John Von Newman and Oskar Morgenstern in 1994, when their first edition of the Theory and practice of Game and Economic Behaviour had appeared. Game theory is a body of knowledge that deals with making decisions when two or more intelligent and rational competitors are involved under conditions of conflict or competition.

The famous examples of game theory may be: managers of the two rival companies competing for the major share of the market, union leaders and management involved in- collective bargaining, the cricket players involved in winning the trophy. The competitors involved in the game are called the ‘players’.

The objective function of every player or players in the group is to choose a particular strategy or course of action to frustrate the opponents in the game and eventually with the game. This is, of course, based on the premise that every player in the game is perfectly rational, logical, and Sims at winning the game.

Game theory models as applicable to decision- making can be classified depending on the (i) number of players, (ii) sum of gains and losses, and (iii) number of strategies. If the number of player is two then the game is called ‘two person games’.

Similarly, if the number of persons in the game is in the game is called person game. When the game theory is classified on the basis of the sum of the gains and losses, there are two possibilities – (i) if the sum of gains and losses is zero, the game is called’ zero-sum game’, and (ii) if the sum does not equal zero, this is labeled as ‘non -zero – sum game’

Game theory (two-person, zero-sum game) is based upon the following assumptions:

i. Every player in the game is both logical and rational.

ii. The objective function of the player is to maximise his profits and gains and minimize his losses.

iii. The players choose a strategy suitable to them and the game is repetitive.

iv. The number of strategies available to the players are finite.

v. The communication between the players is not allowed but the players are fully aware of the information relevant to the competitive situation.

vi. The outcomes of all the courses of action are known to the players in advance.

Game theory has been increasingly applied in defence where the para-military planners used to apply the theory in planning and decision-making. Game theory in has been appreciated on the following grounds:

It develops a framework for analyzing decision-making in competitive situations. Interestingly, such a framework is not at all available through any other analytical technique.

It describes and explains various phenomena in conflicting situations, for instance, collective bargaining and the formation of coalitions.

It is a highly sophisticated and systematic quantitative methods that enables competitors to select rational strategies for the attainment of goals.

Though game theory is quite useful in defence organisations, it is not frequently used in solving the business problems due to the rapidly, changing variables and also because of the difficulty in assessing the competitors response very accurately.