Tuesday, January 5, 2010

game theory and business/economic analysis

From Dennis Berman in the WSJ (hat tip: Linda Christiansen)...

Dr. Bueno de Mesquita is in the wonky business of applied game theory. This is the stuff of Cold War strategists, who deployed computers to find the most logical choices for fighting a war. Dr. Bueno de Mesquita's innovation is to update many of those Atari-era concepts for a Wii generation. That means bringing sophisticated game theory and prediction techniques into everyday choices: local politics, legal battles, and yes, Wall Street deal making.

The 62-year-old has honed down many of these concepts into a new book, called "The Predictioneer's Game." If you can stomach the author's self-regard, it's a bracing, eye-opening primer into the strategic decision-making that lies at the heart of the merger game....

The key to unlocking all this rests inside his mathematical model, which was developed over 30 years with early assistance from Defense Department grants (the military and CIA have used it). The model takes simple inputs for each player: a number that captures each player's desired outcome, his power, his negotiating flexibility and the issue's importance.

When just a few players are involved, it's easy to keep track of these dynamics. But once the group expands to dozens or hundreds, "you, being human, can only keep track of so much information," says Dr. Bueno de Mesquita. "The computer has this incredible memory." (You can play with a stripped-down version of the program at predictioneersgame.com)

The model then crunches the data, looking for the ebbs and flows of negotiation: who might form a coalition; who loses interest; and who can exert the most power as conditions changes. It is like chess, with people....


At January 8, 2010 at 9:21 PM , Anonymous Anonymous said...

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