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Game theory: what is it?

Game theory is an interesting and curious strategy for people’s behavior in different situations. Related to Mathematics, game theory leads its participants to make the best choices, including about finances.

Certainly much is said about game theory and the possibility of learning concepts and tactics, which help when making risky investments, as well as variable income investments. So, learn more about this theory, what it is, what they are and much more, check it out!

What this article covers:

What is Game Theory?

Game theory is a solution within mathematics used strategically to evaluate different situations in which those involved – logically called players – are always looking for better results.

With this, it is as if, in game theory, the situations occurred in a hypothetical social environment and with players competing with each other. Therefore, this theory is seen scientifically as a strategy, or at least a useful way to improve participants’ attitudes.

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This rationale for game theory was first worked out by mathematicians Jhon Von Neumann and John Nash (hence you will probably also see the term Nash Equilibrium).

What are the main principles of Game Theory?

At first, it is worth understanding that for game theory to work, it is necessary to relate it to a scenario in which rational players interact with each other. Each participant has their moves, and strategies. And the winner, in game theory, or his reward, will depend on these strategies.

What are the main principles of Game Theory?
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Thus, one of the principles of game theory, or basic concepts, is that before making a decision, the player must put himself in the shoes of the opponents in order to imagine what his own reaction would be.

So this leads to another principle of game theory, namely that your decisions are not independent, but made up of several chain actions that approximate equilibrium.

How can Game Theory be applied in various situations?

With such a perspective of what game theory is, we can say that it applies in any everyday situation where a decision needs to be made. See these 3 situations to use game theory:

Game theory in competition between companies

What we call a game in this game theory can be easily associated with two rival companies in the same market niche.

Here, the important thing is to focus on decision-making – a term not only used in this theory but also in business administration.

The theory of games in business competition is based, then, on the principle of imagining the reaction of the opposing company to your action. In this sense, it is worth studying the interesting numerical equation explained by this theory.

Game Theory in Management

On the other hand, the same game theory holds true for an internal scenario, where a company needs to change the price of its product, for example. This would increase sales. However, if you use game theory first, you conclude that your competitor can also lower the price and, in this case, generate losses.

Game Theory in Investing

Apply game theory to your everyday life as an investor. To do this, you must first outline your goals. Next, you need to understand your investor profile, so that you can follow the market according to the gains you want to make.

Game Theory in Politics

The best known and most interesting way to use game theory is in Politics, where it is possible to make alliances between parties, for example. Or even ending conflicts and keeping the peace.

Game theory in Politics can be divided into two concepts: Theory of Peace (used by the UN) and Shapley’s Value (shows the advantages for each player, in this case the country, parties, etc., when cooperating in the face of a conflict).

What is the role of Game Theory in economics?

Game theory is perhaps best put to good use in economics. By the way, game theory was a classic example in past moments in the history of economics, such as, for example, in neoclassical economics.

In the past, people had difficulty with entrepreneurship and could not understand how imperfect competition worked. But the novelty of game theory managed to relate the market process to the behavior, or action, of an individual.

No wonder game theory is a guide to business when looking at supply and demand. As well as for finance, and even before investing in the stock market.

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