What Founders Need to Know About Game Theory

And How It Can Increase Your Chances of Success

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Why limit ourselves?

Game Theory has made enormous contributions to economics and international relations. Yet these fields cannot solve all of our problems. We still have many unanswered questions about human nature that do not necessarily fit into neat models based on rational actors maximizing utility.

It is an excellent tool for optimising outcomes, but it will not show us the best outcomes.

What Game Theory can do for you

Game Theory can help you understand your competitors better. It can help you predict how they will react to your moves, and thus allow you to anticipate their actions and navigate through the fog of war.

The Prisoner’s Dilemma

Two prisoners are separately being interrogated in separate rooms by different interrogators who have no communication between them whatsoever (so there is no way for prisoners to communicate with each other).

What should these prisoners do?

This is an important question because it has implications for things that we care about in real life, such as business and science. If both prisoners cooperate, they both get the best outcome.

What do you do?

Here is where game theory comes into play, there are three possible outcomes here:

  1. One prisoner defects while the other cooperates;
  2. Both prisoners cooperate.

Game theory provides rules for what players should do when faced with this choice (as well as many other choices).

The two most important rules are:

  1. Do not reveal information about your strategy until it is too late for your opponent to react effectively (this is called “muddying the waters”).

Limitations of Game Theory

Games like the Prisoner’s Dilemma are known as “zero-sum” games. In a zero-sum game, the sum of the payoffs that all players receive is zero. In this game, if one prisoner gets 1 year of jail time then the other prisoner gets 7 years of jail time, and vice versa.

  1. hey do not allow for repeated interactions.

Founder of Cudy Technologies (www.cudy.co), a full-stack EdTech startup helping teachers and students teach and learn better. I am also a mentor and investor.