The mathematical theory of games was invented by John von Neumann and Oskar Morgenstern (1944). ‘Game theory is the science of rational decision making in interactive situations’ (Dixit & Skeath, 1999). ‘Game theory can be defined as the study of mathematical models of conflict and cooperation between intelligent rational-decision makers.’(Myerson,1991).
Both these definitions focus on the interactive component between the parties. At the heart there are the twin issues of conflict and cooperation. There is the assumption that these decision makers are rational and have specific objectives in mind which in a dispute is to reach a settlement.
Game theory, a mathematical model used in a variety of dispute contexts starts with the premise that the participants, while not knowing fully the position of the other party, are rational and want to achieve the best possible outcomes.
Levine (2019) stated despite the intensity of a dispute, both sides ultimately want to achieve the best possible outcome. Each party has to assume that the other party is rational even though he may not know exactly what the other party wants.
It is in this situation that the third party negotiator’s role becomes increasingly important to help move the parties along in the process of information exchange until they come closer to a common understanding as to what the other person wants.
Game theory provides a new language to think of human behaviour and of parties who are in conflict. Negotiation can be used in the family setting to alter the expectations and preferences of the parties. In game theory, one of the dominant models which has been used to explain the behaviour of individuals is the Nash Equilibrium. In game theory, the Nash equilibrium, named after the mathematician
John Forbes Nash Jr. is a proposed solution of a non-cooperative game involving two or more players in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only their own strategy (Osborne & Rubinstein, 1994).
The usefulness of the Nash Equilibrium is that it comes to a point where the parties realize that they will need to settle in order to maximize their chance of a positive outcome. According to Levine (2019), the use of game theory is not meant to assume that within it is the solution to real life issues. What it offers is simply a model to understanding conflict situations and analyzing how parties can make decisions that result in positive outcomes.
Game theory shows win-win situation. It can apply in the business environment, to ensure every parties have the reason to smile.
Dixit, & Skeath. (1999). Games of strategy. 3
Levine, D. K.(2019). Game theory and the law.(alternative dispute resolution). Retrived on the 25th July, 2019 from the Kmnp Law Website www.Kmnplaw.Com.
Myerson, R. B. (1991). Game theory: Analysis of conflict. Harvard University Press, (1), vii–xi
Osborne, M. J., & Rubinstein, A. (1994). A course in game theory. Cambridge, MA: MIT.,14.
Ojeaburu Friday Msc, ACA, PhD (in view)
Ojeaburu, Friday (ACA, BSc, MSc, PhD) is a seasoned Chartered Accountant with over 14 years accounting experience. He has experience in corporate accounting, financial accounting, financial management, financial audit, public sector accounting, environmental accounting, entrepreneurial accounting, Cv writing, business plan writing, online coaching, research writing etc.