Playing the Business Game

Poker Anyone play poker? Do you play the probabilities? What happens when someone bluffs?

John von Neumann Mathematical genius von Neumann, 25, plays poker, invents game theory. Sees someone bluff and realizes that the best way to play the game is not to play the probabilities, but to play according to what moves the competition makes. Figures out mathematically what the optimal moves are when two rational people play a game.

von Neumann is a major force in inventing the atomic bomb and the computer Two Rand Corporation scientists invent the Prisoners Dilemma game based on von Neumanns theory of game strategies. – You have to take into consideration the objectives and strategies of the other players. – Your moves depend on your competitors moves.

The Prisoners Dilemma In 1950 a conductor on a train to Kiev rehearses for a Tchaikovsky concert. KGB arrests him for subversive activity. KGB arrests Boris Tchaikovsky, a laborer, on the streets of Kiev. KGB puts them in separate cells so they cant communicate. KGB offers them both a deal.

The Prisoners Dilemma If the conductor turns states evidence and Boris doesnt, the conductor gets one year in a gulag and Boris gets 25 years in a gulag. If the conductor doesnt turn states evidence and Boris does, the conductor gets 25 years in a gulag and Boris gets one year.

The Prisoners Dilemma If both turn states evidence, each gets 10 years. If neither the conductor nor Boris turns states evidence, each gets three years.

Boris Conductor RatNot Rat Payoff Matrix Rat Not Rat 10, 10 *1, 25 25, 1 3, 3 * Conductor, Boris

The silent auction begins. – Because they cannot communicate, they must each think what the other person is likely to do and act accordingly. – Because of the huge penalties for being the only one to remain silent, both turn states evidence on the other.

Each serving 10 years, they meet in the gulag, begin talking. and discover they ratted on each other. They realize that if each had said nothing, they would only have been in for three years.

The Prisoners Dilemma If the prisoners had been able to communicate, what would have happened? If they had been given a chance to play the game again and again, what would have happened?

The rules for the game changes when you play repeatedly, as the Rand Corporation scientists discovered. When playing repeatedly, if the other side gets greedy (which is inevitable in our culture), you must teach the other side cooperation. – To do whats best for both. Use a Tit-For-Tat strategy.

Strategies Tit-For-Tat, while effective, leads to escalation in many situations. – The dollar auction A dollar bill is put up for sale; minimum bid one cent. Proceeds as a regular auction. One exception: Auctioneer must be paid by highest bidder, and also by the second highest bidder. – Winning bidders pay what they bid and receive the dollar. – Second-highest bidders pay what they bid and receive nothing. Game introduced in Thousands of games, average paid was $.3.41

The Business Game See Game Theory- Sales case on for another business game using various strategic moves: – Tit for Tat – False announcement – Secrecy – Preemptive Move – Bluffing

Mixed Strategy In poker and in business, you cant bluff all the time; no one will believe you. Should bluff occasionally. – Use a mixed strategy. – On a random basis. No identifiable pattern.

Games Zero-sum games – Assume a winner (+1), and a loser (-1) – Winner take all. Multi-player games – Marathon racers, different niches (men-women), many prizes. – Business – a marathon. – Strategies are about achieving objectives (not necessarily winning in a zero-sum game). Delighting customers Increasing market share Continual innovation

Strategies Depend on objectives Depend on the game Depend on the rules (practices and laws) – Dont fix prices – Use guaranteed lowest price instead – Dont threaten – Use warnings instead – False announcements – Use trial balloons instead

It might be a smart strategic move to change the game and the players. In fact, it might be a smart strategic move to pay someone to compete. – Coke, Pepsi and NutraSweet – Lin, McCaw, and Bell South

Media Business Ethics Follow the rules of the game (precedent, past and current practices, and, above all, laws). Be fair to consumers and customers – to all stakeholders.