how game theory affects entrepreneurial decision

In the article “how game theory affects entrepreneurial decisions”, Varun Dutt looks at how game theory can improve the way a business runs.  He goes through a couple examples on how game theory will give leaders of businesses advantages in certain situations they face. I found it really interesting because it was taking the theories we learned in class and relating them to situations we might face in our careers.

One example Dutt gives is two people are working on a project and one of the employees is working hard and the other one is slacking off. He says to make the project like the prisoners dilemma in which the Nash equilibrium is both employees trusting each other or in this case working together. This is created by making bonuses dependent on how the team functions and joint evaluations.  By doing this both players are going to want to work well together because it has the best payoff for both players, and in turn you as the leader of the business because you get their best work.

Another example is to use people’s perceived payoffs and consequences to get the best out of people. If people think there is a greater payoff to miss deadlines than to make mistakes they will always be missing deadlines. By counteracting this you can create rules to make the missing deadlines worse this way you can see what your employees are working on and be on top of things rather than constantly behind the 8-ball. The goal is to use rules to make the equilibrium to the games that people face during work something that you want.

Using game theory can be really helpful to a business and you are able to manipulate the way people approach their games to your advantage. I believe this is a great strategy because you are taking a step away and not making emotional decisions like, yelling at people who miss work and punishing people for not working together, which lead to uncomfortable working environments. Game theory can lead to a much more comfortable work environment and in turn create better results for a business.


One thought on “how game theory affects entrepreneurial decision”

  1. That is a very interesting application of game theory. One reservation I have is whether the incentives will have the desired effects. With an eye out for adverse effects, I would agree that viewing incentive systems within the perspective of reaching a Nash equilibrium is useful. A better incentive structure could shift the results in other, public government, systems as well such as our welfare system. I wonder how incentive shifts could motivate people to gain education and reach meaningful employment.

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