Game theory > Business

Game theory in practice: scheduling the FIFA World Cup group stage
The 2010 World Cup is on and occupying more of my time than I'd like to admit. The first part is my favorite segment of the tournament. There are always quality matches, and every game affects a teams chance to advance. In case you're unfamiliar, the first part is known as the ...

The St. Petersburg Paradox: a flimsy critique of expectation theory by people who don’t know math or economics
As someone who uses math and economics for a living, I come across many opposing arguments. There are always people who wish to prove to me economics is fundamentally flawed. My first encounter of this type came after my freshman year of study at Stanford. I was sharing some economics ideas ...

Applying game theory to relationships, MBA, parenting – 4 videos by Barry Nalebuff
Barry Nalebuff is co-author of three of favorite game theory books Thinking Strategically, The Art of Strategy and Co-opetition. So I was thrilled to see there are four small talks from him, courtesy of BigThink In no particular order, here are the videos: Enjoy! VIDEO 1: applying game theory to human interaction

Why target-based bonuses encourage cheating, and how to motivate instead
Performance bonuses are often said to be a necessary evil. They are necessary to motivate and reward outstanding performance. But they can be evil as they can encourage cheating. Warren Buffett once wrote: "Managers that always promise to 'make the numbers' will at some point be tempted to make up the ...

Why tobacco companies might like the advertising ban
Several years ago, the U.S. government came down hard on tobacco companies and limited advertising on TV and in magazines. The move was meant both to discourage smoking and to punish the tobacco companies. Is that what really happens? It's worth analyzing since advertising bans are often discussed. There used to ...

The Price is Right Lucky Seven game – a good example of dominated strategies
The game show The Price is Right has so many fun games to analyze. One of my favorites is called "Lucky Seven" or "Lucky $even." This is a guessing game and the prize is a brand new car. Here is how the game works. You start out with seven one-dollar bills. You ...

Why decision by committee often fails
Facing a tough choice, my boss set up a committee to decide. The committee spent days arguing and eventually came up with a horrendous recommendation. Sound familiar to you? image credit: dandechiaro I've wondered why committees often fail and make terrible decisions. Recently I came across a mathematical illustration that helps explain ...

Game theory videos by Tim Harford
I recently finished Tim Harford's book The Logic of Life which is an entertaining economics read. (My favorite part is the discussion about Giffen goods). I was pleased to discover a couple of videos used to promote the book that discussed game theory. The videos are cute and brief explanations of ...

Gaming gift card bonuses – a math excursion
I'm not a fan of gift cards, but a recent promotion got my attention. A store was giving a bonus for gift card purchases. It worked like this: if you purchased a $50 gift card, then you would get a $10 gift card for free. I thought the 20 percent bonus ...

Why game theory matters for business (quote)
A few weeks ago, I spoke to college students and business professionals in India about game theory. Here is a picture of me from one of the talks: Accepting trophy from NMIMS in Mumbai--said to be "one of the best business schools in India"--me on left I was thrilled to discuss game theory ...

Bluffing in poker and game theory
I came across an interesting video clip about bluffing in poker. The video clip features mathematician Ken Binmore and concerns betting strategy in poker. Binmore explains why poker pros bluff wildly and suggests the reason why amateurs don't bluff enough. The advice was timely as it actually helped me in my most ...

Excessive punishments and game theory
How much punishment is enough? This is an interesting question for game theory. One of the reference models is the repeated Prisoner's dilemma where players have to use the threat of punishment as a means to achieve cooperation. Sometimes harsh punishment is the right move. I discussed this before in the context ...

Game theory at Denny’s
After a late night out, I found myself at the only eatery still open in the suburbs, the late night haven that is Denny's. When paying for the meal, I noticed a curious offer on the receipt that read something like: If your receipt does not list a food or drink you ...

Las Vegas and game theory: an application of the Prisoner’s Dilemma
The Prisoner's Dilemma is a great example from game theory. The game illustrates why individuals might not cooperate even if it is their best interest to do so. I will briefly summarize the game below, but if you're familiar with the Prisoner's dilemma you can safely skip ahead to the section ...

An evil bidding war
A few readers pointed me to an amusing and devious bidding war featured on the site Gizmodo. You can see the full-sized picture by clicking on the thumbnail image I've posted: The postings suggest an interesting story. Someone has lost her iPod touch and is offering $50 as a reward. And someone ...

How to bet on sports and the Super Bowl using game theory
The 2010 Super Bowl matchup is set. The Indianapolis Colts will face the New Orleans Saints. Already there is much speculation about who is the favorite, which quarterback will perform, which defense or offense will show up, and how these dome teams will play in an outdoor stadium. In fact, none ...

How to avoid the winner’s curse using game theory
I've made a huge mistake--GOB and others from Arrested Development Strangely, in many auctions it is a huge mistake to win. Winning can either be unprofitable or less profitable than expected, kind of like a Pyrrhic victory. The tendency of the winner to overpay is more commonly known as the winner's ...

The bottle imp paradox
I can calculate the movement of the stars, but not the madness of men—Isaac Newton, after losing £20,000 in the South Sea Bubble in 1720 One of my first stock purchases was Lucent Technologies in the late 90s. It was an unusual buy. I only did casual research. And what little ...

Fair division in homeowner association fees
I received a great email from Hector regarding game theory: Hi Presh. I enjoy your blog a lot, and recently a situation arose where I think game theory could be applied, so I thought I'd send you an email to see if you have any opinion on it. Here in Mexico, "private" ...

Game theory and pricing cell phone minutes
Why did business X follow strategy Y? While we rarely know the inside thinking, it can be fun to speculate. In the past, I have considered the motivation behind free samples (betcha can't have just one) and price matching (surprise, this might not help consumers!). Recently Rohnel emailed me to consider ...

Why you can trust a woman with an MBA
My newlywed friend is applying for an MBA. She and I were discussing her application and general factors, like lost salary and tuition cost. But then the conversation shifted towards strategy. How would the MBA affect her employability in a game theory sense? We came up with a few ideas, and ...

How to negotiate a pay raise using game theory–Youtube video
Update: Several of you have pointed out I have blogged about this topic before! For a more advanced discussion, please read my article how to negotiate at your job using game theory. I came across an interesting video that relates game theory to salary negotiations. The video is "How to Negotiate a ...

The flu and game theory
The current swine flu scare is a reminder that the flu is a fierce disease. New strains can develop quickly and disarm populations. One only has to remember the 1918-1919 Spanish flu which caused anywhere from 20 million to 40 million deaths. Combating the flu is no small feat. It requires ...

Game theory and salary transparency
In 1994, shock jock Howard Stern created a public storm and ran for the governor of New York. His campaign was regarded as a publicity stunt, but some worried his radio popularity would convert into votes and make a mockery of American politics. Luckily, the fears never materialized. Stern dropped ...

Is it better to play your strength or your weakness? Finding the right mix
Top ranked tennis player Rafael Nadal seems to win by surprising opponents with his unexpected left-handed spin..but perhaps even more surprising is that Nadal is naturally right-handed! It might be fair to say that Nadal's success stems not just from his bulging muscles, but also from his ability to surprise opponents. ...

4 tips for winning in a game of chicken
The game of chicken is often told through a story about reckless teenagers. In the classic game, two teenagers are driving towards each other on a crash course. The point of the game is to overcome fear and stay on course. The driver that gets scared and swerves away is ...

Game theory in the news–the financial crisis, Macs and viruses, the bus-wait formula, and more…
[Update: Welcome readers from Simoleon Sense] I'm on vacation through the end of the year so I'm mixing things up. I've been seeing a lot of good articles on the web about game theory and want to share them with you. Enjoy and happy holidays. (If you're looking for more to read, ...

Why Toyota wants GM to be saved—a game theory case study
Here's the latest twist in the auto bailout: Detroit's Big Three aren't the only automotive companies that want to see the government step in with some much needed financial help. Overseas automakers, most notably Toyota Motor, all endorse some form of federal aid to keep General Motors, Chrysler LLC and possibly Ford ...

Understanding the winner’s curse
Sometimes winning comes at too high a cost. In such cases, it is the winners that are the real losers. The phenomenon is known as the "winner's curse" and it affects a wide variety of situations, from baseball free agency signings to stock market IPOs. Whether you are an executive in ...

How to negotiate at your job using game theory
My underpaid friend used every trick during salary negotiations to no avail. This year she got the raise she deserved. The trick that finally worked was getting sick. My friend joked the company would only realize her value after she left. By chance, it happened much sooner. My friend became very ...

Game theory and racism: the Schelling Segregation Model
[update: welcome readers from The Club for Growth] Fidel Castro says America is "profoundly racist." What do you think? His statement made me think about segregation. I thought about racially divided neighborhoods in big cities. I thought about the "racial cliques" I observed among peers at Stanford. I thought about how few ...

The Game Theory of Stacking Matchups in Your Favor
Baseball pitchers and competition San Diego pitcher Jake Peavy did not like being called soft. On August 13, 2008, one day before a scheduled start, Peavy was brooding about accusations that he was choosing to face weaker opponents. Radio hosts were critical that Peavy had missed facing elite pitchers like ...

Business Drinking and the Dollar Auction Game
Business drinking provides a fun subject for strategic thinking. My friend told me about a telling experience on a business trip. He had visited a bar after a long day only to find members from a competitor company show up as well. The competition greeted him politely and offered to ...

A Day in the Life of a Game Theorist: A Tribute to One Year of Game Theory Tuesdays
Today I take moment to celebrate the one-year anniversary of “Game Theory Tuesdays.” I can’t believe it’s been a year already and it has been quite the journey. The column started as a mission to show how our daily lives could be improved with math and strategy. I was warned ...

The Game of Free Food: Why We Should Just Say No
photo by jbcurio How do you shop for food? Whether you realize it or not, every time you enter the store you are engaged in a game with food companies. You want to get the best deals. They want to make the most profit. The game is about dividing the surplus ...

Heart Disease and Used Cars
Why are so many people taking drugs for cholesterol? I pondered this question after reading about a new study on Vytorin: And the results left unanswered whether a drug that has been proved highly effective at reducing “bad” cholesterol—and has racked up $5 billion in sales in 2007 as a result—offers ...

10 Tips for Traveling Safely with Valuables
photo credit: GrooverFW A successful vacation depends as much on safety as it does on activities. The best travel plans can be sabotaged by pickpockets and dishonest hotel staff. Travel risk is inevitable because valuables like money and passports are needed when traveling overseas. So how can you protect yourself? This article ...

Why Patience Pays Off in Negotiations
photo credit: MShades via flickr A family caught my attention in a restaurant. A young kid was keeping his parents busy. He demanded an appetizer because the main course took too long. He then passed time playing video games on his cell phone. Soon he became bored again, so he took ...

How to Use Lies for Good, or Why Honesty Isn’t the Best Policy
image source: karindalziel via flickr Whoever said “honesty is the best policy” had to be lying. Lies have saved many messengers from being shot, and many couples from explosive arguments about body image (“Honey, do I look fat in this? Tell me the truth..."). There’s certainly much to be said about honesty ...

Voting Power in Israeli Judge Selection and the Shapley-Shubik Index
source: ninjapoodles via flickr How many votes should be necessary for a decision? Is a simple majority sufficient, or should a higher standard be applied, such as a consensus? These are questions and circumstances we all face, whether as a voter or an organizer. Understanding voting theory can help you ...

Why You Might Want to Burn Bridges
Image source: peasap via flickr Forget the advice “never burn bridges.” There are many times that burning a bridge is not just beneficial, but absolutely necessary to accomplish a goal. "Never burn bridges" generally means don't leave a job or relationship on bad terms recklessly. While I agree with this particular ...

How to Deal with Bad Service—Be Reasonably Unreasonable
Being reasonable doesn’t work “And how will you be paying today?” the pizza cashier asked me. I hesitated before I answered. I was being asked to pay full price, even though the store caused a 30 minute delay by burning my original order. I didn’t exactly have time to spare because ...

The Dice Brain Teaser: A Technical Interview Question that Can Help You Solve Problems Better
Today’s puzzle is special. I like it even more than previous brain teasers I’ve discussed, like the monk problem and the hat puzzle. Like the others, this is a technical question sometimes asked during job interviews (hat tip: Reasonable Deviations). But unlike the others, this problem serves as an introduction to some ...

Three Ways to Protect Your Email Privacy Using Low-Tech Encryption (Caesar Cipher, Vigenère Cipher, Three-Pass Protocol)
Emails worry me I wrote half as many emails the day after meeting the company legal staff. I learned that emails are often discoverable in court, and it was rumored company email was being scanned. This whole episode annoyed me, because as a consultant, I enjoyed the convenience of email. But I ...

Why eBay and Craigslist are Similar in Theory: the Revenue Equivalence Theorem
I can be bought. How can I get a high selling price? Imagine for a moment that I was for sale. Let’s say I was selling myself as a date to raise money for charity. There are many factors I might consider to increase my selling price. How I describe myself is ...

The Leaders Dilemma: How to Generate Cooperation at Home or Work
Motivating Joke One I found in my email: A couple in their nineties was having trouble remembering things so they went to their doctor for checkups. The doctor told them that they were both physically fine and advised them to write things down to help them remember. Later that evening while watching television, ...

The Hat Puzzle (A Consulting or Engineering Interview Brain Teaser)
The Hat Puzzle is one of my favorites. This is one of those brain teasers people might ask in an interview for a consulting or engineering job. Here is the problem, as worded by Sara Robinson (this is a good article to read): Three players enter a room and a red or ...

Hotelling’s Game, or Why Gas Stations Have Competitors Nearby
There are hundreds of gas stations around San Francisco in the California Bay area. One might think that gas stations would spread out to serve local neighborhoods. But this idea is contradicted by a common observation. Whenever you visit a gas station, there is almost always another in the vicinity, ...

Game Theory scene from A Beautiful Mind
Two Introductory Announcements First, welcome to the Mind Your Decisions “week of skepticism.” All this week I will address misguided or crooked financial advice. The general theme is to be more careful about advice from people who sell you products or don’t consider strategic implications. Especially watch for well-intentioned but poorly ...

Markets Aren’t Perfectly Competitive: The Game Theory of Why a Smoking Ban Might Make Sense
This article will arm you with a powerful critique. In no time you’ll be second-guessing how fiscal conservatives talk about economics. Here’s one of the most common criticisms of a new law: “My opponent supports law X. While I agree with the spirit of law X, I do not think the government ...

Use Randomization to Cut Costs in Security and Enforcement–It Worked for American Airlines
Game Theory 101: keep your opponents off guard. If you can do that, you don’t need to work very hard. Cops know this. They can’t monitor all motorists, so they randomly assign squad cars to high traffic areas. They put empty squad cars on the side of highways. The threat of ...

Make Money By Assuming the Best (Rationality) but Allowing for the Worst (Irrationality)
Some people think game theory is a joke. They say the games are unrealistic and yield poor predictions. I understand the criticism, but I completely disagree with the overall point. I profit tremendously from game theory. I gain an advantage when game theory works. That’s what I usually write about. Today, ...

Dealing With an Auto Mechanic and the Principal-Agent Problem
On a recent lazy Sunday, I planned to get the oil in my car changed. I called a nearby store to check their availability. The salesperson was glad to help me, and he even told me there was a $10 off coupon on the website. I thanked him, went online, and ...

The Ultimatum Game and The Hollywood Writer’s Strike
Once during college, an annoying person asked me for game theory help. I offered to help even though it interrupted my own work. It was hard to turn down someone who lived in the same dorm. I offered to help, but wanted something in exchange. The person was a teaching assistant ...

Separating Equilibrium: Why Expensive Gifts Aren’t Always Proportionally Better
If you want to give a great gift, you do not need to spend tons of money. In fact, I’d say that many times the more you spend on a gift, the less value you will get. This is not just frugality advice. It is based on a game theory result. ...

The Tragedy of the Commons: Working During Holidays and Why Thanksgiving Almost Didn’t Happen
I will never work during the Christmas holidays again. Not after what happened last year. I was looking forward to the end of the year. A big deadline had passed, and my expected workload involved quantitative modeling, which was both manageable and enjoyable (this is nerdy stuff that I really like). ...

The Strategy of Surprise: Will the Fed Cut the Rate Next Week?
The hot topic in the investing world is whether the Fed will cut the federal funds rate next week. The word on the street is yes, it is basically certain: Federal funds futures show traders see a 100 percent chance of a reduction in the benchmark rate [in December], with a ...

Outcome Obsession: The Problem of Mechanism Design, as Demonstrated in Baseball
I discussed mechanism design recently and suggested how it can be applied to solve routine problems. I was thrilled to see that one reader intends to use mechanism design as a parenting tool. I hope the reader will design a good mechanism and succeed in its application. But it would ...

The game theory of buying clothes, and why money tips are often short-lived
I discovered a money tip before I moved to college. I was living in Illinois and it was a chilly September. But I actually needed more summer clothes because I was moving to warmer California weather at Stanford. Since I was shopping out of season, most what I wanted was ...

Using mechanism design to improve your finances…it’s as easy as splitting a Coke
I have to thank my fifth grade math teacher for unintentionally introducing me to game theory. The game theory is hidden in the following extra-credit problem that he asked us: My mother would often give a can of Coke to me and my two brothers and tell us to split it. ...

How can you stop free riders and games of chicken? Try changing the game
Here is some advice you can take to the office: if you aren’t winning the game you are playing, consider changing the game. If you find yourself yelling at people, please stop and think about why people are acting that way. Just asking people to change is hard. Rational people respond ...

Why cooperation fails, and how to fix the problem using game theory
Some people criticize game theory (and to some extent economics as a discipline), calling it unrealistic and focusing on selfish behavior. Just check out this comment from a review of James Miller’s Game Theory at Work: You and I both know that in reality, things simply don't work that way between ...

The strategy of limiting options: why less can be more
source: antanask via flickr Consider the following situation: John and Tim are both finishing projects at a consulting company and they are ready to be staffed on new projects. Their skill-sets and work ethics are similar, and both are considered team-players. Though they are comparable employees, their projects have been very ...

Why those price match guarantees may end up costing you a fortune
This week’s game theory post is motivated by a question from loyal reader JoeP about pricing strategies. If you have a question about personal finances or game theory, feel free to send me a line. Here is what JoeP wrote: An interesting thought stuck me yesterday as I drove by the ...