Game theory provides a framework for analysing strategic decision-making under uncertainty, making it a valuable concept for risk professionals. John von Neumann, along with Oskar Morgenstern, introduced foundational concepts in their book Theory of Games and Economic Behavior, establishing game theory’s central role in economic and strategic analysis. The minimax theorem, developed by von Neumann, became a cornerstone of game theory, defining optimal strategies in competitive scenarios.

Game theory models how competitors anticipate each other’s moves, offering tools to analyse strategic interactions — a crucial skill for managing risk in competitive or adversarial environments such as cybersecurity, financial markets, and supply chain management.

In cybersecurity, game theory can model interactions between attackers and defenders. For example, defenders allocate resources to protect assets, while attackers select vulnerabilities to exploit. The minimax theorem states that in zero-sum games — where one player’s gain equals the other’s loss — players can minimise their maximum losses. Here, it translates to strategies that reduce potential losses from attacks while maximising detection and response capabilities.

Beyond cybersecurity, game theory offers insights for other risk domains.

  • In competitive bidding, companies can model rivals’ bids to determine optimal strategies.
  • In financial markets, game theory helps analyse how interactions between investors and market sentiment can drive booms and busts.
  • In supply chain management, companies can model potential disruptions and develop mitigation strategies, factoring in competitors’ reactions.

While the minimax theorem is valuable for zero-sum scenarios, many real-world risks involve shared outcomes and interdependencies. Cooperative game theory, which explores how participants can form coalitions and negotiate pay-offs for mutual benefit, may be more suitable for such cases — such as industry-wide cybersecurity initiatives, or working together with competitors in building strategic supply chains.

Game theory does have its limitations. Real-world scenarios are more complex than the models. And while game theory assumes rational behaviour, decision-making is frequently influenced by cognitive biases and behavioural factors, causing outcomes to deviate from theoretical predictions.

Despite these challenges, game theory remains a valuable tool for risk professionals. It fosters strategic thinking, encourages anticipation of adversarial behaviour, and supports more effective decision-making and mitigation strategies in uncertain and competitive environments.

Further reading

  • Theory of Games and Economic Behavior, by John von Neumann and economist Oskar Morgenstern (1944) (Wikipedia)
  • Minimax theorem
  • Cooperative game theory