Embrace A Forward-thinking Mindset While Employing Strategic Thinking

One of the fundamental principles in game theory is the importance of anticipating future outcomes and making decisions based on backward reasoning.

Basically, it’s important to carefully analyze all potential actions and their potential consequences before making any decisions. Next, take into account the level of desirability of each outcome from the perspective of each player. Use this information to predict the moves that other players are likely to make and ultimately decide on the best move for yourself.

In the following article, you will discover how the principle of anticipating outcomes and analyzing past events can help you make more informed decisions.

Example: Should I promote my business or not?

Let’s take a look at the following scenario:

MegaCorp is currently the sole provider of a specific category of top-notch industrial lasers.

Startupo is a new and cutting-edge company that is thinking about entering the MegaCorp-dominated market.

In order to discourage Startupo from entering the market, MegaCorp could consider implementing an expensive marketing strategy that would require them to make substantial sacrifices in terms of their financial gains.

Given Startupo’s size and agility, they have the advantage of observing MegaCorp’s ad campaign before making a decision on market entry.

Therefore, each company has two options: MegaCorp can choose whether or not to run the advertisements, while Startupo can decide whether or not to enter the market.

There are 4 potential outcomes for this scenario, and the players rank each outcome differently. The most desirable outcome is ranked as ‘1’, while the least desirable outcome is ranked as ‘4’.

Megacorp’s ranking of results:

1. No ads, no entry (of Startupo).
2. Ads, but no entry.
3. No ads, but entry.
4. Ads and entry.

Ranking of Startupo’s results:

1. No ads, yes entry.
2. Ads, but no entry.
3. No ads and no entry.
4. Ads and entry.

From this, we can derive the following game tree (also referred to as a decision tree in situations where there is only one player). It visually represents all the potential moves and outcomes in this particular scenario.

Essentially, when considering whether or not to advertise, MegaCorp carefully evaluates the potential outcomes of this scenario and takes into account the anticipated actions of their competitor.

• If MegaCorp runs the ads, Startupo will opt out of entering the market, as it aligns with their second preferred outcome rather than their fourth. This decision ensures that MegaCorp will also achieve their second desired outcome.
• If MegaCorp decides not to run the ads, Startupo will probably opt to enter the market. This choice would result in a more favorable outcome for Startupo compared to not entering the market. In this scenario, MegaCorp will achieve their third desired result.

Given this information, it is evident that MegaCorp should proceed with its advertising campaign to safeguard against Startupo’s entry into the market. By opting for this approach, they can secure their second preference, just like Startupo. However, if they choose not to run the ads, they will end up with their third choice, while Startupo will claim their top choice.

Here, we utilized a strategic approach of analyzing potential outcomes and reverse-engineering the steps needed to achieve them. By considering the various scenarios and countermoves that Startupo can make in response to Megacorp, we were able to determine the optimal course of action for Megacorp.

Things to keep in mind when implementing this concept

This method of backward induction can be employed to determine the most favorable outcome of a game under specific conditions.

• Order of Play: The game requires a specific order of play, where players take turns one after another rather than all acting simultaneously.
• Limitation: the game must have a definite endpoint, ensuring that it is not open-ended.
• Accurate knowledge: the players should possess accurate knowledge about the potential moves and results of the game, as well as the attractiveness of each outcome.
• Logic: All players should make their move based on reason, selecting the option that benefits them the most.

Undoubtedly, in reality, things can be quite complex, and it’s not always possible to meet all these conditions, especially considering that perfect information is a rarity and people often make irrational choices. The fact that games can involve more than just two players, each of whom can have numerous potential moves and intricate motivations, makes this even more complex.

This all leads to an important point to consider: even though there is a best strategy to choose in a game, it may not be easy to discover (chess serves as a good example of this). Nevertheless, incorporating these additional factors and considerations into the model can often be done, and backward induction remains the most effective approach for dealing with these complex scenarios.

Summary and conclusions

• The concept of backward induction involves starting from the end of a problem and reasoning backward to determine the best course of action.
• Basically, it’s important to carefully analyze the potential actions and consequences of both yourself and the other players before making any decisions. Next, evaluate the various results in terms of their appeal to each player, and use this analysis to predict the potential actions of other players.
• To effectively demonstrate this concept, it is recommended to utilize a game tree. This visual tool outlines the available moves for each player and the resulting outcomes. After mapping out the complete game tree, you can analyze it in reverse to determine the best moves for you to make.
• Certain conditions need to be met for this strategy to be effective. These factors involve players taking turns in a sequential manner, establishing a designated endpoint for the “game,” ensuring that all players have access to complete information, and encouraging players to make logical decisions.
• Implementing this approach can pose challenges in practical situations where circumstances are frequently intricate and certain essential factors may be absent. Nevertheless, backward induction remains a highly effective approach for tackling these challenging scenarios, regardless of the method employed.