With the passing of Nobel Laureate John Nash comes an opportunity to look beyond the popular story of his vexed personal life as recounted in “A Beautiful Mind” and discover – or rediscover – how his mathematical insights changed the way economists think about competition, and what they mean to marketers. If you’re intrigued I recommend The Art of Strategy: A Game Theorist’s Guide to Success in Business and Life by Avinash K. Dixit and Barry J. Nalebuff – a very readable introduction to game theory that’s highly relevant to data-driven marketing, it includes a chapter on Nash equilibrium, which it describes as “…a starting point of the analysis of almost all games.” A Nash equilibrium is simply the collection of strategies for any game where each player’s choice is the best response to all of the other players’ choices. While it’s fair to say that not all marketing can be reduced to game theory, it’s probably also fair to say that marketers who can understand and apply it will generally outperform those who can’t. If a game deviates from Nash equilibrium, then either someone made a bad move – or they weren’t playing the game you thought they were.
Need more motivation? Here are some high-level take-aways from Nash equilibrium’s applicability to marketing:
- If you’re not analyzing your competitors’ choices, you’re probably going to lose. If this sounds obvious, consider how much time and effort marketers spend these days on the trending topic of customer experience (CX). Gartner research shows that 36% of marketing leaders say they competed on CX two years ago, compared with 58% today and 89% two years from now. That’s a Big Trend. But what does it mean to “compete on CX”? For most it means understanding customers through Voice of the Customer studies, monitoring and mining text from social networks and service channels, analyzing customer journeys and behavior data, investing in content marketing, personalized sites and apps and messages, targeted advertising and offers – in short, aiming to make your customers’ experiences as exceptional as possible. But how often does the question come up: “how are my competition’s strategic choices affecting my customers’ perceptions?” Dr. Nash’s insights suggest that the strategic marketer should spend at least as much time modeling and analyzing competition as customers, and assume competitors will do the same. Why? Because CX may include intangibles, but it also includes factors like price, features, and availability. When marketers choose CX strategies that they believe will maximize market share and anticipate that their competition will do the same, the market tends toward a stable equilibrium where players who misconstrue their competitors’ strategies lose.
- Your best strategy may involve cooperation, or it may involve mixing moves. Often a game will have more than one Nash equilibrium (that is, more than one collection of strategies that produces an optimal result). In these situations, sometimes being predictable can be an advantage. For example, consider two retailers, A and B, which can choose whether to go after up-scale customers or down-scale customers. The best outcome for both would be if each went after a different segment, but without being able to collude on strategy, neither knows what the other will do. In this case, signaling intent and sticking with it may be the best strategy. But now imagine a third retailer, C, with no intention of ceding either segment to its competition. It intends to study and exploit A and B’s weaknesses and use superior resources to take market share from both competitors. In this “pure conflict game” each choice (think discount coupon) A and B reveal gives C an opportunity to trump it with a better offer. Now A and B will benefit from choosing randomly from among their best strategies – mixing things up so that C can’t exploit their choices. Nash’s theory reveals situations in which predictability or unpredictability are called for, and often the optimal probabilistic mix of random moves is calculable. This doesn’t mean giving your customers a jarring, unpredictable experience, but it does mean game theory can help when planning the timing of marketing campaigns, special offers, events and other activities.
- When analyzing any strategic situation, start by understanding the Nash equilibrium, then look for reasons why the situation may diverge from prediction. Of course there are many real-world situations that game theory can’t accurately predict, but applying its discipline will inevitably give you more insight into a situation than assuming its complexity exceeds mathematical tractability – or just calling in the data scientist. Perhaps the greatest value of applying Nash’s approach is it forces you to specify your beliefs about what other players – competitors, partners, customers, influencers – will do. This not only forms the basis of a useful model for scenario planning and anomaly detection, but it’s also the root of an empathy discipline that can improve all business decisions (maybe personal ones too).
I’ve sometimes wondered why they don’t teach more game theory in high school math. It doesn’t require much more than algebra (at least at the level of basic conceptual utility) and it has more real-life applications than some other topics I can think of. Maybe it’s because economists ironically don’t seem to have figured out how to use their discipline to sell it to the public – or to develop any sort of useful objective consensus that might guide public policy – but that’s another story. For now, I like to think that the late Dr. Nash had more to contribute to our understanding of the world than his admittedly moving tale of psychological challenges and triumph. He also gave us a unique understanding of how the world of math and logic connects intimately with the world of motivation and behavior – and that’s a beautiful thing.