Friday, April 24, 2020

Game theory in risk management



In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing. —Theodore Roosevelt

Actually, that's Teddy's version of cousin FDR's famous "Try something!"

But what if it's all about a threat -- something external -- for which you have no experience?
  • Call in your PMO team and brainstorm? Perhaps
  • Ask the question -- what's the other guy -- the guy doing the threatening -- going to do?
And, if the other guy does X, what's your next move? With that question, you've arrived at 'game theory'

Game Theory and Project Management

Here's the set-up for game theory and project management: As project managers, we may find ourselves challenged and entangled with sponsors, stakeholders, and customers, and facing situations like the following which some may find threatening:
  • Adversarial (or competing) parties find themselves entangled in a decision-making process that has material impact on project objectives.
  • Adversarial parties have parochial interests in decision outcomes that have different payoffs and risks for each party.
  • External parties, like legislators, regulators, or financiers, make decisions that are out of our control but nonetheless affect our project.
  • The success of one party—success in the sense of payoff—may depend upon the choices of another.
  • Neither party has the ability or the license to collaborate with the other about choices.
  • Choices are between value-based strategies for payoff
Game theory is a helpful tool for addressing such challenges.

Specifically, game theory is a tool for looking at one payoff (benefit or risk) strategy versus another and then asking what the counter-party (adversarial, competing, or threat party) is likely to do in each case.

In the game metaphor, “choice” is tantamount to a “move” on a game board, and like a game, one move is followed by another; choices are influenced by:
  • A strategic conception of how to achieve specific goals
  • Beliefs in certain values and commitment to related principles
  • Rational evaluation of expected value to maximize a favorable outcome—that is, a risk-weighted outcome
Tricks and traps
If you look into some of the issues raised by game theory, there are two that are important for project managers
  1.  Because you don't know for certain what the other guy is going to do, your tendency is to optimize the balance between your risks and benefits, assuming (or hypothesizing) the other guy has a similar motivation: to optimize risk v. benefit conditioned on what you do.
    In this case, "you update your priors" as new insight into the competition becomes visible.

    Actually, this situation is not altogether stable for you, as you've made yourself somewhat hostage to the other guy. And, the other guy likewise. Everything stays in motion.
  2. Or, you may arrive at a spot, called a Nash Equilibrium, where your choices are irrelevant to the other guy's choices. Thus, the other's choices provide no incentive for you to change your mind.
Challenge yourself to a game
To see how this stuff actually works, challenge yourself to a game. Tricks and traps #1 is demonstrated with this video, "The prisoner's dilemma", and then #2 is the next video in the same series that explains the Nash Equilibrium 

Oh, did I mention this is also Chapter 12 of my book, "Managing Project Value"?



Buy them at any online book retailer!

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