Index

Mental Models

Game Theory Basics

The study of mathematical models of strategic interaction among rational decision-makers.

Game theory provides a framework for strategic decisions where outcomes depend on the choices of multiple interdependent actors.

Core question

How does my best action change depending on what the other players are likely to do?

Example

Two competing SaaS companies must decide whether to cut prices. If both cut, margins collapse for everyone. Game theory helps model these interdependent choices before acting.

How to apply

  1. 1.Identify the key players and their available strategies.
  2. 2.Map out payoffs for each combination of strategies.
  3. 3.Look for dominant strategies, Nash equilibria, or cooperative solutions.
  4. 4.Decide whether the game is one-shot or repeated — repeated games allow for cooperation.

Pitfalls

  • ·Assuming opponents are perfectly rational when they often are not.
  • ·Over-modeling simple situations that do not require formal game theory.
  • ·Ignoring that real-world games have imperfect information and asymmetric stakes.

Questions

Do you need math to apply game theory?

For practical decision-making, no. The key insight is thinking about interdependent choices, not computing exact equilibria.

How does game theory apply to negotiations?

It helps you anticipate the other side's moves, identify win-win structures, and avoid strategies that look good in isolation but fail when the other side responds.

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