Game theory for business leaders

Economist turned businessman Barry Nalebuff teaches business leaders to use game theory to help them make the right decisions.

by strategy + business
Last Updated: 23 Jul 2013

Game theory is a mathematical tool developed 60 years ago to anticipate possible scenarios and develop appropriate strategies to deal with them. It teaches people to understand the mindset of key players and anticipate their likely moves. This should help business people, as well as any other player, to figure out the best approach and counter-approach as they implement their strategies.

Nalebuff has written several books which have started to make his game theory approach to business better known. He also hosted TV programme 'Primetime' in March 2006, in which six pairs of strangers had to find one another in the five boroughs of New York City by thinking about the other pair's likely moves. He also uses game theory to drive innovative thoughts and co-hosts a reality TV programme called 'Why Not?'

On innovation, Nalebuff pinpoints four key stages. The first is to get rid of all limitations when approaching a problem. Look at it from the point of view of the most powerful person you can think of. This removes the internal nagging voice.

The second stage is to look where products are poorly designed and incentives are poorly designed, and correct the problem. Blockbuster Video used to buy tapes of films from studios for $99 and had to rent them 50 times to break even. This resulted in a shortage of stock and lots of frustrated customers. They later struck a deal with the film companies to pay only $10 per film and share £1 per rental with the studios -a move that saved the business.

Third, turn things upside down. Nalebuff's party trick is to turn a banana upside down and prove that this is the natural way to eat it (using a film of monkeys doing the same). The point is to challenge our conventional way of thinking to stir up new ideas.

Finally, don't assume you are the first to come up with your idea. Others will have done so and you can learn from what they have done.

Nalebuff's game theory approach to business (which he has put into practice in launching his own company, Honest Tea) involves categorising the 'elements of the game' (e.g. players, rules, perceptions and boundaries) and the linkages between them. He argues that if CEOs do this they will have a more complete picture of the space they are in and the consequences of their decisions.

The Game Maven of New Haven
Michael V. Copeland
strategy + business, Spring 2007
Review by Morice Mendoza

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