Assumption Game Theory: Understanding the Basics

Game theory is a branch of mathematics that explores decision-making and strategic behavior in different scenarios. It has numerous applications in various fields, including economics, political science, and psychology. One of the key concepts in game theory is assumption game theory, which involves making assumptions about the actions of other players to predict their behavior.

## What is Assumption Game Theory?

Assumption game theory is a tool used to analyze strategic interactions between individuals or groups by making assumptions about their motives and expected decisions. In other words, it’s a way to predict the behavior of others based on your own assumptions about what they might be thinking and doing.

The basic premise of assumption game theory is that each player has a set of strategies available to them, and they must choose one based on the actions of others. The assumption part comes in where each player assumes how the other players will act based on their own motives and objectives.

## How Does Assumption Game Theory Work?

Assumption game theory works by breaking down complex interactions into simpler components that can be analyzed more easily. This involves identifying the key players involved in the game, along with their possible strategies.

To illustrate this concept, let’s consider an example:

You are a salesperson trying to sell a new product to a potential customer. You know that your competitor has also approached this customer with a similar product. In this scenario, you would use assumption game theory to predict whether or not your customer will buy from you or your competitor.

### Step 1: Identify Key Players

- You (the salesperson)
- Your Competitor (another salesperson)
- The Customer

### Step 2: Identify Possible Strategies

- You can offer a lower price
- You can emphasize the superior quality of your product
- Your competitor can offer a longer warranty period
- Your competitor can emphasize their reputation in the market

### Step 3: Make Assumptions About Player Behavior

Based on your own motives and objectives, you would make assumptions about how the other players might behave. For example:

- You assume that the customer values quality over price, so you emphasize the superior quality of your product.
- You assume that your competitor values their reputation in the market, so they emphasize their reputation.
- You assume that both you and your competitor are aware of each other’s pricing strategy, so neither of you tries to undercut the other on price.

### Step 4: Predict Outcomes

Once you have made assumptions about player behavior, you can predict the outcome of the game. In this case, if the customer values quality over reputation and is not swayed by price, then you would win the sale. However, if the customer values reputation over quality or is swayed by a lower price, then your competitor would win.

## The Importance of Assumption Game Theory

Assumption game theory is an important tool for analyzing strategic interactions between individuals or groups. It helps individuals predict outcomes based on their assumptions about what others are thinking and doing. By making these assumptions explicit, individuals can make more informed decisions and adjust their strategies accordingly.

In conclusion, assumption game theory is a valuable tool for understanding strategic interactions in various fields. By breaking down complex scenarios into simpler components and making assumptions about player behavior, individuals can predict outcomes and make more informed decisions.