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.

 

Copernican revolution in education

In the 16^th century people believed that the Earth was the center of the universe (http://en.wikipedia.org/wiki/Copernican_Revolution) . It must have come as a shock to the intellectuals of this particular era when Copernicus argued that it is the Earth that revolves around the Sun. To back his arguments he introduced scientific method. Beliefs were challenged by scientific rigor. Gradually science transformed into engineering and humans learnt new skills to build new structures.

Something similar is now happening in education. Books and classrooms have been at the center of how knowledge and information is distributed. In comes the Internet. Books and classrooms move to the edges. The internet is taking center stage.

Universities seem to be surprisingly slow to react to this change. As with Copernicus, the science of the internet era is gradually turning into an engineering art and discipline. We are learning how to design internet enabled businesses and institutions. It is time for the internet engineers of education to step in and to design internet centered schools. This seems to be happening already in the US, but not in Finland.

In strategy the PESTEL framework is a known tool for analyzing ones strategic position. Recently I was speaking on the experimentation I have done together with my colleagues with online education at a conference of higher education research in Finland. I was somewhat surprised with the atmosphere at the conference. Among the participants there were politicians, sociologists, economists and administrators. All the letters in the PESTEL framework were represented, except for the letter T. The letter T stands for technology.

The education environment, when you think about it, has not had to go through and experience technology enabled radical change. The education environment in Finland is built around public offering. There are no private universities in Finland. It seems that within the Finnish educational decision makers, there are no individuals who have experienced how the very existence of one´s organization, including its services, business model (free education?), legal structures and the way it is organized, can be questioned by the existence of new technologies. The internet has changed and continues to change the industrial landscape of the Finnish economy. It is alarming to observe what seems to be a depth of ignorance in the local educational community. The present leaders of educational systems do not seem to see a need for “the engineers of internet based education”.

This is nothing new in the history of innovation. Major radical innovations have always come from outside existing institutions and incumbent businesses. Internet enabled education is gradually reaching maturity and closing in on a tipping point.

The key question really is: where and when will education tip?