Monday, August 5, 2013

Marketing and Game Theory

The other day I was catching up on some of my podcast listening. This episode of the Freakanomics Radio podcast, Jane Austen, Game Theorist, has a couple of great observations about game theory and it's relationship to marketing. Quoting Levitt from the transcript:
the difficulty is that game theory really only applies to a narrow set of problems. That’s a set of problems where there are just two or three, or a very small number of actors. And it really does much better when either the game that is being played is repeated an infinite number of times, the same game is played exactly over, and over, and over to infinity, or it’s played precisely once. It turns out that in the middle ground of there being a handful of participants, or a handful of plays, game theory doesn’t often do such a great job of solving our problems.
And this:
There are two things that are important to doing well in strategic settings. And the first one is knowing enough and being skilled enough to put yourself in the shoes of the other person. So you cannot do game theory unless you can say if I do this, she will do that, if I do that, she will do this. Because that is so fundamental to game theory that if you aren’t in the habit or don’t have the ability to understand how someone will react, you have no hope whatsoever. The second trait, which is valuable, is to be able to look many steps into the future. So you can be only so good at game theory if you can think to yourself if I do this, then he does that. Really good game theorists, the most skilled ones will say if I do this, then he’ll do that, then I’ll do this, then he’ll do that, then I’ll do this and he’ll do that. And that’s kind of the difference between a really good chess player and a not so good chess player is being able to see down the road much further.
Rather than comment extensively on these quotes, I think it's worth noting the observations relative to marketing. Many marketing activities involve making grand projections based on a small set of data. It's also a good reminder that many of our activities involve putting ourselves in the shoes of others. Without this fundamental understanding, our ability to make effective observations and predictions sucks.

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