Playing the Business Game
Poker
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If you have ever played poker, do you play the
probabilities?
John von Neumann
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“The best mind of the 20th Century”
1928 - Mathematical genius von Neumann, 25,
plays poker, invents game theory.
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The odds are meaningless when someone bluffs.
1944 - Von Neumann is a major force in
inventing the atomic bomb and the modern
computer.
1950 - Two Rand Corporation scientists invent
the Prisoner’s Dilemma game.
Game Theory
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You have to take into consideration the
objectives and strategies of the other players.
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Not just the probabilities
Not just your own goals and strategies
Your moves depend on your competitors’ moves
The Prisoner’s Dilemma
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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 worker, on the
streets of Kiev.
KGB puts them in separate cells so they can’t
communicate.
KGB offers them both a deal.
The Prisoner’s Dilemma
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If the conductor turns states evidence and
Boris doesn’t, he gets one year in a gulag and
Boris gets 25 years.
If the conductor doesn’t turn states evidence
and Boris does, he gets 25 years in a gulag
and Boris gets one year.
The Prisoner’s Dilemma
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If both give incriminating evidence against the
other (“rats”), each gets 10 years.
If neither rats, each get three years.
Payoff Matrix
Boris
Rat
Rat
Not Rat
10, 10 *
1, 25
25, 1
3, 3
Conductor
Not Rat
* Conductor, Boris
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The silent auction begins.
The Prisoner’s Dilemma
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Each serving 10 years, they meet in the gulag,
begin talking and discover they ratted on each
other.
While talking, they realize that if each had said
nothing, they would only have been in for only
three years.
Scenario
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KAAA-TV, on the West Coast, is considering
switching from its current prime time (8-11
p.m.) to early prime time (7-10 p.m.). KAAA is
#2 in prime time, and because of KBBB’s very
strong 10-11 p.m. lead-in to its late news, KAAA
is #2 in late news even though its news product
is competitive. KBBB is #1 in late fringe also.
Scenario
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KBBB-TV is #1 in prime time and has excellent
10-11 p.m. network lead-ins to its 11 o’clock
news, which puts it #1 in the late news race.
KBBB is also #1 in late fringe.
KCCC-TV is a weak #3 in prime time and late
news. It is a network-owned station and will not
switch to early prime.
KAAA Decision Tree
KBBB Go
KAAA Go
KBBB No Go
KAAA
KAAA No Go
KBBB Go
KBBB No Go
KAAA Decision Tree
KBBB Go
KAAA Go
KBBB No Go
KAAA
KAAA No Go
KBBB Go
KBBB No Go
Payoff Matrix
Go
Go
KBBB
No Go
4, 2*
3, 4
1, 3
2, 1
KAAA
No go
* KAAA, KBBB
Assigning weights is the most difficult decision.
KAAA’s Payoff Weights
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4, 2 = If KAAA switches (go) to early prime and
KBBB also switches (go), both gain more
revenue from higher ratings for 10-10:30 p.m.
late news. KBBB doesn’t gain as much as it
would if KAAA switches and KBBB doesn’t (3,4).
KAAA’s Payoff Weights
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3,4 = If KAAA switches (go) and KBBB doesn’t
switch (no go), KAAA gains revenue with its 1010:30 p.m. news, but the news is up against
KBBB’s strong prime and KBBB’s late news gets
higher ratings than before because KAAA has
dropped news from the time period.
KAAA Strategies
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1,3 = If KAAA doesn’t switch (no go) and KBBB
switches (go), KAAA loses big because its
weaker 10-11 p.m. prime is up against strong
KBBB news which has strong leadins and strong
late fringe.
2,1 = If KAAA doesn’t switch and KBBB doesn’t
switch, nothing happens, but the outcome isn’t
as bad as if KAAA doesn’t switch and KBBB
switches (1,3).
KAAA Strategies
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Adding KAAA go weights (4+3 = 7) shows
switching is the best strategy, because its no-go
weights (1+2 = 3) are much worse.
KBBB’s judged weights are the same with either
decision (4+1 and 3+2 = 5).
KAAA Strategies
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KAAA’s best strategy is to announce it’s staying
with its current schedule, hoping KBBB will
switch to gain an advantage and hurt KAAA
(1,3).
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False Announcement
Or consider a Preemptive Move
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Amazon.com
Then, at the last moment, KAAA switches to
early prime to gain its maximum outcome (4,2),
assuming KBBB stays with its decision to switch.
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Secrecy
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Apple
Game Theory
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See “Game Theory- Sales ” case on
www.charleswarner.us/indexppr.html for
another business game using various strategic
moves:
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False announcement
Secrecy
Preemptive Move
Tit for Tat
The Prisoner’s Dilemma
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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 Prisoner’s Dilemma
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The rules for the game changes when you play
repeatedly, as Rand Corporation scientists
discovered.
And if the other side gets greedy (which is
inevitable), you must use Tit-For-Tat.
You must teach the other side cooperation (to
accept three years in the gulag) – to do what’s
best for both.
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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.
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Coke, Pepsi and NutraSweet
Lin, McCaw and Bell South
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The lessons are:
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Know what game you’re playing
Know the rules of the game
Play to win-win (cooperate). Do not play a zero-sum
game (win-lose).
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Think “we,” not “me.”
– Collectivism vs. individualism