What can the Strategist Learn from Game Theory?

I have for some time now been interested in Game Theory. During the summer I read the book “Strategy – an introduction to game theory”, by Joel Watson. The question is what insights can game theory give us on strategy?

From a game theory perspective strategy is all about interaction. It emphasizes vicarious thinking. A strategist should continuously be thinking, what are others thinking and how should I react to what they are planning. My key question to a strategist is, can he think? Game theory teaches you to think rationally. My second question to a strategist is are you open enough and true to yourself in your thinking? Are you really willing to question and analyze your position and your very existence?

To be provocative game theory does not talk about vision and mission. Joel Watson defines strategy “as a complete contingent plan for a player in the game”. Game theory begs the strategist to ask himself (and his organization) where am I, what can I do?

Best response is a term introduced by game theory. The term seems to be self-explanatory. One is doing the best one can in a given competitive environment and situation. However it is not trendy, nor common to hear a CEO announce that our strategy is a best response strategy. It is perhaps more fun to talk about vision and mission. But really, when you think about it, playing a best response strategy in a given situation is a great achievement.

The local alcohol monopoly Altia is an interesting example. Alcohol is not good for you. It is well known that overuse leads to serious health problems. One could argue that granting a monopoly to a state owned company is a best response strategy by our society to a difficult issue (a vicious problem). The role of law, in this case, is to intervene in the market place and to lock-in a societal “best response”.

The CEO of a company should actually be contemplating, what is preventing him from playing an even better strategy. Should he act to change the rules of the game? Should he lobby to change laws? Should he maybe buy out competition?

When each player is acting in their best interest i.e. playing a best response this might lead into a situation which is unsatisfactory to every single player (this is known as a prisoners dilemma). On a grand scale our societies have found themselves facing what a prisoner’s dilemma with climate change. It is not in the interest of a single company to reduce pollution. This teaches us that there are areas in which markets are not the best solution, if left to their own. It also teaches us that we need vision and mission to overcome the shortcomings of a best response approach.

The concept of Nash equilibrium is fascinating.  One of the insights is that sometimes your best strategy is to randomize i.e. keep the opposition guessing. I recall when in my high school studies we started to throw a coin to determine which of two possible choices we would give to a test question. The teacher was quick to rebuke us. Randomizing and bluffing is something we do not expect business leaders to do. We don´t regard it as acceptable.

The Nash equilibrium teaches us, very clearly, that randomizing can be a best strategy. Another word for randomizing is bluffing. Very often communication has been cited as the number one challenge in implementing a strategy. One should always remember that communicating one´s strategy is always part of the strategy. Hence one should approach communicated strategy with a critical mind and sometimes put more value on observing how strategy really is implemented.  

It is interesting to observe the role of strategy in the public sector. A good politician to gain power will bring up issues, which the earlier government did not talk about. Is this not, in the grand scale of things, a randomizing strategy?

When working in the public sector, I have, on several occasions, found what I believe to be a potential new market. When suggesting that we could do things more efficiently (e.g. with online learning) and that we could perhaps cut down on the amount of financing per student and scale up operations the ideas get quickly hushed away. Have you ever heard anybody in the public sector announce, that please give us less money? Could it be that in the public sector many of us fall back to implementing a bluffing/randomizing strategy, because we can´t find a clear dominant strategy?

I am a technologist. Technology can create new Nash equilibria. This in practice means that present society might be locked in inefficient equilibria and technology can provide new ways for societies to be more efficient. Why do we for instance not have electronic signatures in Finland, why do we not have an internet enabled university. The Internet is one of the main technologies which are now challenging the way we organize things in our society.

To restructure our society we need vision but we also need game theory to teach us how we can be locked into inefficient situations and why are real strategy may in reality be a randomizing strategy.