The news that the Liberal Democrats are looking at using game theory to decide their tactics in the event of a hung parliament come the next general election only serves to heighten interest in how this area of mathematics can be used in strategic situations.

But without retraining to become a boffin like former Shell economist and Lib Dem treasury spokesman Vince Cable, how can businesses put game theory to work for themselves?

James Miller, author of Game Theory at Work: How to Use Game Theory to Outthink and Outmaneuver Your Competition and an associate professor in economics at Smith College in Massachussetts, says that game theory can be used by managers who want to find an employee to take on a tough project through an internal auction. “Instead of having the boss choose who does it, you ask who is willing to do it for the least amount of extra money,” he says.

Another application is in the use of so-called information markets, which can be used as a way of gauging employee sentiment towards a new business idea. For example, if a software company is planning a new product launch and wants to estimate how many units it will sell, by asking the company’s employees to make bets on sales, company management can access “hidden” information.

Miller says: “If the boss really believes in the new launch but the employees don’t that will come out.” He believes Google uses such betting techniques internally, although the value of these markets is restricted bvcause companies in the US are banned from allowing their employees to bet with real money so they have to make use of fake dollars for their bets.

Another area that is coming under particular scrutiny at the moment is the design of bonus schemes, says Arne Andersson, CEO of Trade Extensions, a company which uses game theory to help businesses formulate strategy.

“Designing a company bonus scheme is challenging since you have to overcome the inherent contradiction that they incentivise individuals to act selfishly while working for the long-term good of a company,” he says. “Game theory can help solve this contradiction by ensuring that the individuals’ actions in manipulating the bonus scheme for their own good, have the effect of creating long term stability for the company – or whatever it is the company wants to achieve.”

Basing a bonus on annual profitability might be good for a sales person but a poor choice for a CEO. “This type of bonus scheme is easy to manipulate and can lead to uneven profit cycles as CEOs are happy to take big losses one year, and not receive a bonus, to ensure they receive a bumper pay-out the following year when profitability is high,” he says.

“A better way to incentivise CEOs is to make them shareholders in the business but to impose restrictions that determine when the shares can be sold – for example one year after they have left the company. This means they are encouraged to take a long-term view and ensure the company remains profitable.” For many companies this may seem like common sense, but this is game theory in practice.

In an economic downturn, negotiations with suppliers take on an added edge and game theory can really come into its own.

In real games, such as poker and chess, players want to win outright since there are few downsides to losing, other than a dent to the loser’s pride. In the world of business, companies that win consistently in negotiations are likely to find that their long-term relationships suffer. This pragmatic approach is the origin of the win-win concept, with both sides in a negotiation coming away feeling they have gained something from a deal.

The key to achieving win-win, says Miller, is working out in advance what will happen to your business and also to the other party, a supplier perhaps, if negotiations break down. Walmart, for example, uses this to its advantage, asking to see the tax records of potential suppliers in order to estimate the lowest price they could buy at that the supplier is still keen to sell. This is game theory but may have as much to do with the company being the world’s largest retailer.