The study of game theory shows that–in the right scenario–predicting the future can be whittled down to pure mathematics.
So, what is game theory? By definition, it is:
“The analysis of a situation involving conflicting interests (as in business or military strategy) in terms of gains and losses among opposing players.”
More specifically, game theory is branch of mathematics meant to model the decision making processes of individuals and groups of people. It can be used in some cases to actually predict the actions of others, therefore helping individuals and groups to react accordingly.
Brilliant mathematicians and game theorists like John Nash–the subject of the academy award-winning movie “A Beautiful Mind”–have seen their work applied across a number of different fields of study, from economics, to politics, and even advertising.
And though game theory may be useful in more in-depth subjects, like curtailing nuclear proliferation, it can also be applied to one’s day-to-day life.
So how can game theory help you?
While auction theory is an entire subset of game theory in and of itself (a particularly complex one too), there are a few simple tricks that the everyday seller can use to optimize returns. One of the most important tricks, according to Nobel Laureate William Vickrey, is choosing the right type of auction.
Vickrey recommends using a second price auction, in which bidders seal their bids in envelopes and send them up to the auctioneer. In the end the bids are tallied and the highest bidder wins.
However, the winning bidder does not pay the highest price–they pay the second highest price.
This, Vickrey contends, incentivizes bidders to bid higher than they normally would have otherwise, therefore maximizing the overall return by driving bids.
Negotiating a raise[contextly_sidebar id=”tkSLzLTo09AWHoKcf7ZTuUT8varw54AZ”]
Worried about getting that raise you’ve (slowly) been building up the courage to ask for? Turns out game theory can help increase the chances that you don’t walk away empty handed.
While raises can’t be willed into fruition, even by the most adept game theorist, there are a number of strategies that can maximize a positive response. Some tips according to game theory include:
- Make the offer first – according to game theory, asking for a raise, as opposed to being offered one almost always works out in the employee’s benefit. By starting the conversation, the employee is able to frame the conversation in their advantage
- Don’t be afraid to counter – making a counteroffer is key to opening up negotiations. If the amount is too small, act accordingly
- Assess your position – by assessing your trustworthiness and value to the company, you can make an informed decision on whether or not to spring for a raise or wait until in you’re in a position of more power
- Reciprocity – essentially, you get what you give. Also known as Tit for Tat strategy, this rule of game theory dictates that if you are amicable to your superior, you will get the same in return (this, however, works in the converse as well)
- Do your research – are there pay precedents? How much is your superior making? Are you the longest-serving employee? For every rebuttal your boss may have, it is good to have a preconceived response
Bidding on a home
Just like auctioning, bidding on homes can also be optimized through game theory.
Buying a home, especially one that already has multiple bids, can be a tricky process, and leaves potential buyers just three options.
When it comes to multi-bid negotiations, a buyers’ options are as follows:
- Withdraw your bid
- Keep your bid the same (claim that it is your best offer)
- Increase your bid
So what to do? While it may be tempting to overpay for a house one has their heart set on, this is far from the optimal choice.
Even though overpaying may guarantee that a buyer successfully purchases the home, winning in this game scenario is about placing the optimized bet–one that doesn’t necessarily result in purchasing the house, but purchasing it for the best possible price.