You Got Game Theory!
Source Michael Hoover
Date 05/02/02/11:42

FAST COMPANY Issue 91 February 2005 Page 32
You Got Game Theory!

It was all such fun until we realized that no business really uses game

By Martin Kihn

Game theory is the fun-sounding branch of economics introduced in the
1940s by Hungarian genius John von Neumann and developed in the 1950s by
Princeton's John Nash, subject of the 2001 Oscar-winning film A
Beautiful Mind .

Over the years, the status of game theory -- which describes the
interactions of self-interested parties such as poker players and deal
makers -- soared, and its insights were applied to fields as
far-reaching as evolution, auctions, even counterterrorism. Playing
along, we here at the CDU decided to find out just how much court time
game theory gets in the big game of business. After all, it has been
taught to almost every one of the some 2.5 million MBAs and economists
in the United States alone. Surely, we thought, it would be a slam dunk
to turn up dozens of examples of game theory applied in the real world.

Adopting our usual rigorous methodology, we set the following
parameters. To count, an example must:

1. be an actual business situation where somebody used the insights
of game theory;
2. have occurred within the past five years; and
3. involve real, live, actual companies -- not governments,
nonprofit organizations, or Russell Crowe.

First, we scoured the literature. We selected a relevant portfolio of 40
publications and submitted our queries. We tried again. And again. And
we found . . . nothing . There were plenty of mentions of government
spectrum auctions, and A Beautiful Mind came up hundreds of times. Not
quite what we had in mind.

Perhaps, we thought, the media just doesn't get it. Undaunted, we
assembled a panel of 30 respected game theorists around the world, and
we sent them a survey asking, "Can you think of any examples of real,
live companies that have consciously applied game-theoretical concepts
to a real business problem?"

The response was . . . a deafening chorus of head scratching.

"The short answer is, I don't know," said David Levine of UCLA. "Let me
think about this," replied MIT's Muhamet Yildiz.

Others on our expert panel, while not offering up any actual, you know,
examples , were willing to speculate on why they couldn't. Traditional
game theory "prescribes a lot of advice that does not actually seem to
work," admitted Paul Bartha of the University of British Columbia. Why
not? Maybe because "the sorts of situations that would allow the
application of formal methods are so simple that people can understand
them without much help," suggested the University of Minnesota's Andy

Does that mean game theory is just, um, common sense? "Game theory gives
you a nice systematic way to think about strategy, but it's not magic,"
agreed Hal Varian, an economist at the University of California at
Berkeley and coauthor of the bestselling Information Rules (Harvard
Business School Press, 1999). Or, as MIT's David McAdams put it, "Game
theory is really a frame of mind and, once you have it, you see it

Everywhere, perhaps, and nowhere.

In the end, none of our experts had a concrete example. But many offered
the same advice: "Ask Preston McAfee" -- an economist at the California
Institute of Technology and perhaps the country's foremost working game
theorist (he designed that government spectrum auction). He was more
encouraging: "There are lots of examples," he emailed, agreeing to an

We reached the professor in his office at Caltech. "So," we asked, "what
are all these examples of game theory applied to real life?" There was a
silence on the line. "Well," he said, "a lot of companies hired game
theorists to prepare for those spectrum auctions." Okay -- but what
about nongovernment auction situations? "I don't know of any companies
that employ pure game theorists -- but maybe they're keeping it quiet."

Very, very quiet.

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