A great piece from the economist, titled Game Theory in Practice:

FOR a man who claims to lack expertise in the field, Bruce Bueno de Mesquita, an academic at New York University, has made some impressively accurate political forecasts. In May 2010 he predicted that Egypt’s president, Hosni Mubarak, would fall from power within a year. Nine months later Mr Mubarak fled Cairo amid massive street protests. In February 2008 Mr Bueno de Mesquita predicted that Pakistan’s president, Pervez Musharraf, would leave office by the end of summer. He was gone before September. Five years before the death of Iran’s Ayatollah Khomeini in 1989, Mr Bueno de Mesquita correctly named his successor, and, since then, has made hundreds of prescient forecasts as a consultant both to foreign governments and to America’s State Department, Pentagon and intelligence agencies. What is the secret of his success? “I don’t have insights—the game does,” he says.

Mr Bueno de Mesquita’s “game” is a computer model he developed that uses a branch of mathematics called game theory, which is often used by economists, to work out how events will unfold as people and organisations act in what they perceive to be their best interests. Numerical values are placed on the goals, motivations and influence of “players”—negotiators, business leaders, political parties and organisations of all stripes, and, in some cases, their officials and supporters. The computer model then considers the options open to the various players, determines their likely course of action, evaluates their ability to influence others and hence predicts the course of events. Mr Mubarak’s influence, for example, waned as cuts in American aid threatened his ability to keep cronies in the army and security forces happy. Underemployed citizens then realised that disgruntled officials would be less willing to use violence to put down street protests against the ailing dictator.

And these models don’t just apply in econ (including negotiations)

But game-theory software can also work well outside the sphere of economics. In 2007 America’s military provided Mr Bueno de Mesquita with classified information to enable him to model the political impact of moving an aircraft carrier close to North Korea (he will not reveal the findings). Game-theory software can even help locate a terrorist’s hideout. To run simulations, Guillermo Owen of the Naval Postgraduate School in Monterey, California, uses intelligence data from the US Air Force to estimate on a 100-point scale the importance a wanted man attaches to his likes (fishing, say) and priorities (remaining hidden or, at greater risk of discovery, recruiting suicide-bombers). Such factors determine where and how terrorists decide to live. Game-theory software played an important role in finding Osama bin Laden’s hideout in Abbottabad, Pakistan, says Mr Owen.

Where is all this heading? Alongside the arms race of increasingly elaborate modelling software, there are also efforts to develop software that can assist in negotiation and mediation. Two decades ago Clara Ponsatí, a Spanish academic, came up with a clever idea while pondering the arduous Israeli-Palestinian peace process. As negotiators everywhere know, the first side to disclose all that it is willing to sacrifice (or pay) loses considerable bargaining power. Bereft of leverage, it can be pushed back to its bottom line by a clever opponent. But if neither side reveals the concessions it is prepared to make, negotiations can stall or collapse. In a paper published in 1992, Dr Ponsatí described how software could be designed to break the impasse.

Difficult negotiations can often be nudged along by neutral mediators, especially if they are entrusted with the secret bottom lines of all parties. Dr Ponsatí’s idea was that if a human mediator was not trusted, affordable or available, a computer could do the job instead. Negotiating parties would give the software confidential information on their bargaining positions after each round of talks. Once positions on both sides were no longer mutually exclusive, the software would split the difference and propose an agreement. Dr Ponsatí, now head of the Institute of Economic Analysis at the Autonomous University of Barcelona, says such “mediation machines” could lubricate negotiations by unlocking information that would otherwise be withheld from an opponent or human mediator.

Such software is now emerging. Barry O’Neill, a game theorist at the University of California, Los Angeles, describes how it can facilitate divorce settlements. A husband and wife are each given a number of points which they secretly allocate to household assets they desire. The wife may inform the software that her valuation of the family car is, say, 15 points. If the husband puts the car’s value at 10 points, he cannot later claim that he deserves more compensation for not getting the car than she would be entitled to.