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1. Game Theory
Based on Brandenburger and Nalebuff s article, "The Right Game: Use Game
Theory to Shape Strategy," describe and analyze the essential elements
of game theory. Explain which two economic structures might engage in game theor
y and which two will not.
2. Strategy Traps
In Brandenburger and Nalebuff s article, "The Right Game: Use Game Theory
to Shape Strategy," the authors describe five traps of strategy. Selec
t any one of the five and provide a real world example of an organization fallin
g victim to that trap.
Game theory is a special branch of mathematics which has been developed for stud
ying decision-making in complex cirscumtances. Game theory tries to predict outc
omes based on interactive models in which the desicions of the party affect the
decisions of the other parties. The meaning of "Game" here is: a move by one pla
ter will result in moves of others. The idea historically dates back to the Talm
ud and Sun Tzu;s writings. However, the contemporary codification is attributed
to John von Neumann and Oskar Morgenstern. They published the Theory of Games an
d Economic Behavior in 1944. In the early 1950's, John Nash generalized thier re
sults and provided the basis of the modern field of Game Thoery. A rapid rise i
n theoretical developements led to the founding of the first academic magazine d
evoted to the field by Oskar Morgenstern in 1972. Few corporations nowadays thin
k about thier strategy without adding some game theory models or game elements i
nto thier strategy process.
Game thoery can be defined as the study of how people interact and make decision
s. This broad defintion applied to most of the socual sciences, but game thoery
applies to mathematical models to this interaction under the assumption that eac
h person's behaviour impacts the welll-being of all other participants in the ga
me. These models are often quite simplified abstractions of real-world interacti
ons. while many fame theorists cetainly enjoy playing games, a "game" is an abst
ract reporesentation of many serious situations and has a serious purpose.
--Preparing business negotiations
--Analyzing future market conditions
--Strategic decision-making
--Assess the viability of a new venture,bussiness model, program, prokect, produ
ct, service, or technology.
A major issue with game thoery is:it is necessary to make assumptions. Any model
of the real world must make assumptions that simplify the reality,because the r
eal world is to complex to anslyze with any precision. There is a constant trade
off between realism and the technical capability to solve problems. Even if one
could write down a model that accurately describes how people make decisions in
general, no amount of computers would be alue to calculate it.
What assumptions are made normally? The usual assumptions are:
--Rationality: People take whatever actions are likely to male them more happy.
And they know what makes them happy.
--Common knowledge. We kwno that everyone is trying to make himself as happy as

possible, potentially at our expense.

These assumptions take many mathematical forms, from very strong (and likely unr
ealistic) towards much weaker forms in the study of behavioural game theory.
Experimental economics examines the validity of these assumptions by seeing how
real people act in controlled environments.
The most widely known example of game thoery is probably the Prisoner's Dilemna:
A zero-sum game cooperation game that got its name from the following hypotheti
cal question: imgaine two criminals arrested under the suspicion of having commi
tted a crime together. However, the police does not have sufficient proof to hav
e them convicted. The two prisoners are being isolated from each other, and the
pilice offers each of them a deal: the person that offers evidence against the o
ther one will be freed. If none of them accets the offer, they are infact cooera
ting against the police, and both of them will get only a small punishment becau
se of lack of proof. They will both win. Howeverm if one person betrays the othe
r, by confessing to the police, he will gain mote, since he is freed. The one wh
o remained silent o the other hand, will receive the full punishment, since di n
ot help the police, and there is sufficient proof. If both betray, both will be
punished, but less severely than if they had refused to talk. The dilemna reside
s in the fact that each prisoner has a choice between only two options. Buth the
y can not make a good decision, without knowing what the other person will do.