Game theory is the science of interaction. It involves thinking about how the other side will respond.” Essentially, it’s the practice of always trying to think of your opponent’s next move or even their move after that. All the while attempting to gain and leverage the other side’s objectives to predict what actions they will take.
Recently, we sat down with Barry Nalebuff, Yale professor and co-founder of Honest Tea, who explained how you could use game theory in your life, business, and evaluating investments. After all, as Barry notes, for a game theorist, “Pretty much everything in life is a game, and if you’re going to play it, you might as well play it well.”
Barry, through several insights and a personal story, lends some advice on how you can use game theory to evaluate your business or startup’s next move if there even is one.
See The Big Picture and Anticipate The Competition’s Reaction
Let’s say you think you’ve just come up with the next great soft drink. Like Barry’s idea of, “Mixing orange juice and club soda…It’s a great drink, it tastes good, it’s an organic, all natural soda. It has half the calories of oranges. You could sell it and it would have half the cost of making orange juice and sell for the same price. Better margins, great product, it’s all good.” You feel your idea is foolproof and you can’t wait to start raising money and producing your product. Except you failed to account for one thing.
As Barry explains, having a great product in an established space is not enough. You have to look outward, at the industry as a whole. If you focus on your product only, the only thing you have a recipe or design for is a failed business. You have to think ahead, use the principles of game theory and try to evaluate the field, the competition, and how they are likely to respond.
The problem with bringing a new product into an established space with larger competitors is that they already have the power. “If we had made our orange soda product, we would have just been test marketing for Tropicana.” Then as soon as you begin to gain some traction, the big players will come in with a perfect copy of what you’ve done and dominate. Then you’re stuck; frustrated and angry that someone stole your idea. So the question is, how do you do it?
Find and Highlight What Sets You Apart
The trick is to find something deeper the competition isn’t doing that makes you unique, and that they cannot, or will not do. Take note of where your competitors are looking and look the other way. With Honest Tea, Barry explains, “The way we were making it, literally, boiling water and adding tea leaves was not something the big players were doing. They were used to using syrups, concentrates, and powders. The way we did things was much harder for them to copy than the way they were used to.”
Succeed by finding your own unique path to breaking into the market and putting in the extra effort to differentiate yourself from the industry giants.
In many cases, it even hurts them to attempt to copy you. If current tea giant’s customers are looking for the sweet, sugary, almost candy-like flavor, it’s harder for them to introduce their customer base to something that strays from that path and doesn’t align with what they expect from the established brand.
So next time a great new startup idea hits you, take a moment to look outside of your product. Remember the story and lessons from Honest Tea and utilize a little game theory. Predict your competitor’s reaction and how you can beat them at their own game.
We dive into more exciting applications of game theory in your life, such as how to guess SAT answers without the questions, and even more in the full hour long interview with Barry.