Is Game Theory the answer?

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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. In doing so, assume (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"?

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The skills stack

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The skills stack. Heard of it? Somewhat like other stacks of stuff, except the focus is on skills needed in the PMO ... and elsewhere. 

Actually, to me, the description of the stack as provided by strategic thought leader Greg Githens, is less a stack -- which implies an ordering from top to bottom -- and more a flat mesh of interrelated skills. 

 

As used by Githens, one might argue with the term "skill", given that we usually think of skill as some ability specifically learned, practiced, and applied. But, if you expand "ability" into practiced and applied behavior, and also into directed energy and attention, then "skill" in this broader sense is what Githens is getting at. 

 

So, here are three "skills" ... broadly speaking ... I particularly like, as authored by Githens:

... AMBITION, [which] captures an individual’s desire to... achieve their goals.

... ANTICIPATION, [which] is ... looking into the future, knowing that your decisions today will bear their consequences in the future. ...

... REFRAMING, [which] is .... intentionally adopting new points of view and explanations. ...

To this I might add:

• Ambition is typically personal, and often self-centered, but in a larger calling, one could be ambitious to be consequential, to wit: to make a difference that affects others as well as yourself. To be consequential, to have made a difference by your efforts, could be your goal. Why not?
  
  
• Anticipation is certainly looking ahead into the future. A skillful anticipator can assemble a narrative, with its attendant consequences, benefits, costs, and risks, and sequence the tactics necessary to achieve the objective.
  
  
• Reframing is a quite useful skill, often stated as "walk in the other guy's shoes". In effect, step out of your frame of reference and see it from your nemesis', customer's, sponsor's, or partner's perspective, experience, and sense of risk.
  Often, you have to set aside many biases, and reorder priorities in order to skillfully reframe a situation.
  Set aside biases? Really? That's not an easy thing to do. The science of game theory, however, provides some of the tooling that useful for seeing things from another point of view.

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Smart and Not-so-Smart

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Harry’s poker-playing friend claimed that probability theory, and how to play your cards according to the rule book, was the easiest thing in the world.

But what separated smart players from the not-so-smart was the ability to understand how their opponent was thinking ...

Harry Hole, Detective,
according to author Jo Nesbo

Now, in project terms, we would like to think we don't have to worry about opponents. But, of course, that's not the case. Most practical projects at scale have a nemesis, either technical, managerial, or political.

Also, it would be great if we could all grasp "Game Theory" which lays out methodologies for assessing what your opponent is likely to do in the context of what you might be likely to do. [You can read some about this in Chapter 12 of my book, cover illustration below, "Maximizing Project Value"]

In effect "Game Theory" combines probabilities, rules for applying game rules, and methodologies for  making an 'informed estimate' of what others might do.

Stability and equilibrium
If you are working with probability theory in your project, then you are thinking and acting with some uncertainty in mind. As our detective friend says in the opening quote, just understanding some of the 'rules' around uncertainty estimates is not enough.

Coming to some sort of stable (and predictable) position in the project environment is perhaps the most advantageous outcome one could expect in an environment of uncertainty. 

 Perhaps the most practical utility of Game Theory, as applied to projects, is developing equilibrium as a stable and desirable outcome. Odd as it sounds, equilibrium is often achieved by accepting a sub-optimum outcome as a compromise outcome between 'adversaries'. 

And why would you settle for sub-optimum? You settle because the alternative is more costly without compensating benefit.

The "Nash Equilibrium" 

The Nash Equilibrium is an example of such an outcome, and it is explained in Chapter 12. In essence, you and your opponent agree to a compromise plan for which their is no net upside for either of you to divert from the plan. In other words, at the Nash Equilibrium, things are worse for you (and your adversary) if either of you make a change.

The counterpoint is obvious: as long as there are incentives for a more advantageous deal, stability will always be on the knife's edge. Recognizing whether or not you've achieved a Nash Equilibrium may be the smartest thing you can do.

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Buy them at any online book retailer!

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!

Kahn Academy on game theory

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Chapter 12 of my book, "Maximizing Project Value", posits game theory as tool useful to project managers who are faced with trying to outwit or predict other parties vying for the same opportunity.

When John von Neumann first conceived game theory, he was out to solve zero-sum games in warfare: I win; you lose. But one of his students challenged him to "solve" a game which is not zero-sum. To wit: there can be a sub-optimum outcome that is more likely than an outright win or loss.

For this most part, this search for compromise or search for some outcome that is not a complete loss is throughout the business world, the public sector (except, perhaps, elective politics), and certainly is the situation in most project offices.

The classic explanation for game theory is the "prisoner's dilemma" in which two prisoners, both arrested for suspected participation in alleged crimes, are pitted against each other for confessions.

The decision space is set up with each "player" unable to communicate with the other. Thus, each player has his/her own self interest in mind, but also has some estimate of how the other player will react. The decision space then becomes something like this:

1. If only you confess, you'll get a very light sentence for cooperating
2. If you don't confess but the other guy does, and you're found guilty, you'll get a harsher sentence
3. If both of you confess, then the sentence will be more harsh than if only you cooperated, but less harsh than if you didn't cooperate
4. If neither of you confess, risking in effect the trust that the other guy will not sell you out, you and the other prisoner might both go with a fourth option: confess to a different but lesser crime with a certain light sentence.

From there, we learn about the Nash Equilibrium which posits that in such adversarial situations, the two parties often reach a stable but sub-optimum outcome.

In our situation with the prisoners, option 4 is optimum -- a guaranteed light sentence for both -- but it's not stable. As soon as you get wind of the other guy going for option 4, you can jump to option 1 and get the advantage of even a lighter sentence.

Option 3 is actually stable -- meaning there's no advantage to go to any other option -- but it's less optimum than the unstable option 4.

Now, you can port this to project management:

• The prisoners are actually two project teams
• The police are the customer
• The crimes are different strategies that can be offered to the customer
• The sentences are rewards (or penalties) from the customer

And so the lesson is that the customer will often wind up with a sub-optimum strategy because either a penalty or reward will attract one or the other project teams away from the optimum place to be. Bummer!

There are numerous YouTube videos on this, and books, and papers, etc. But an entertaining and version is at the Khan Academy, with Sal Khan doing his usual thing with a blackboard and and voice over.

And, you can read Chapter 12 of my book: "Maximizing Project Value" (the green/white cover below)

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Read in the library at Square Peg Consulting about these books I've written
Buy them at any online book retailer!

Read my contribution to the Flashblog

More about game theory -- and the PMO

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Probably the greatest benefit of working with game theory arises from evaluating the consequences of each game step.

• You do this ... your consequence
• Your competitor or opposite number does something .... their consequence

The challenging game situation for the PMO is when your game opposite can't or won't collaborate with you, making the consequences for both potentially less optimum than if you collaborated

• Adversaries across the table in a negotiation
• Business partners that are really your nemesis
• Win-lose situations ... often politically motivated (shocking!), but sometimes it's all about money (another shock) ... if the other guy gets it, you don't

Sort of win
Some people are stubborn; they insist on win-lose when sort of win - sort of win is available. In some circles, this is called compromising to get more than nothing.

Nash Equilibrium
Did you see the movie "A Beautiful Mind" or read the book about the Princeton mathematician, John Nash?
Nash was a game theorist. He devised something called the "Nash Equilibrium".

In practical terms, you and your non-collaborator have arrived at a Nash Equilibrium when simultaneously neither you nor your opposite has an alterative game move of greater benefit. Consequently, neither you or your non-collaborator is motivated or incentivized to change positions. To wit: you've arrived!

Ooops! There's a cost for being at equilibrium. In fact, you may have arrived at a sub-optimum point when looking through the lens of win-lose; but when taking the broader and more strategic view point ..... win-win .... you are at a good spot.

Strategic thinking
Why is win-win more strategic? Because today's competitor may be tomorrow's partner .... certainly that's the case in the technology contracting business. To win, you often have to fill a hole in your corporate resume. And that filler partner may have been your game competitor in the last competition.

---

Read in the library at Square Peg Consulting about these books I've written
Buy them at any online book retailer!

Read my contribution to the Flashblog

Timing is not everything

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"Just because something happens after something else happens doesn't mean it happens because something else happened

• Show me your data
• Show me your assumptions
• Tell me what questions you asked
• Tell me why you didn't ask other questions"

From the TED Radio Hour, "Big Data"

So, what we have here is the tyranny of the "Three Cs" *

• Coincidence, perhaps better written as co-incident to emphasize the timing of multiple incidents, but having no other coefficients or linkages among them
• Correlation, meaning one effect or outcome is predictable upon the occurrence of another, though the "other" outcome may have many contributors, so the correlated effects may be "weak"
• Cause-and-effect, meaning one effect or outcome is both predictable by- and, indeed, caused by the presence -- or not-presence -- of another

It seems we always are confronting the confusing rule that "correlation is not causation, but causation requires correlation"

Chapter 2 of my book "Quantitative Methods in Project Management" goes into these ideas in more depth (did I mention it's available at any online book seller?)

Of course, when there is a human in the loop, then all of the correlating or causative linkages are influenced by biases, most non-linear and very situational, but some amenable to "game theory" which is discussed in other posts in this blog

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* There is a 4th C: co-variance, an ideas from statistics. Related to correlation, co-variance describes how the spread -- or distribution -- of uncertain or random outcomes of one thing is made different in some sense by the presence of another random or uncertain outcome.
If there is zero co-variance, then the uncertainties are "independent" of each other; otherwise they are not.
In most project environments we can't actually measure co-variance; what we can do is test for independence and thus infer a co-variant effect, or not.

---

Read in the library at Square Peg Consulting about these books I've written
Buy them at any online book retailer!

Read my contribution to the Flashblog

Game theory with Khan

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Chapter 12 of my book, "Maximizing Project Value", posits game theory as tool useful to project managers who are faced with trying to outwit or predict other parties vying for the same opportunity.

The classic explanation for game theory is the "prisoner's dilemma" in which two prisoners, both arrested for suspected participation in alleged crimes, are pitted against each other for confessions.

The decision space is something like this:

1. If only you confess, you'll get a very light sentence for cooperating
2. If you don't confess but the other guy does, and you're found guilty, you'll get a harsher sentence
3. If both of you confess, then the sentence will be more harsh than if only you cooperated, but less harsh than if you didn't cooperate
4. If neither of you want to confess, you and the other prisoner might both go with a fourth option: confess to a different but lesser crime with a certain light sentence.

From there, we learn about the Nash Equilibrium which posits that in such adversarial situations, the two parties often reach a stable but sub-optimum outcome.

In our situation with the prisoners, option 4 is optimum -- a guaranteed light sentence for both -- but it's not stable. As soon as you get wind of the other guy going for option 4, you can jump to option 1 and get the advantage of even a lighter sentence.

Option 3 is actually stable -- meaning there's no advantage to go to any other option -- but it's less optimum than the unstable option 4.

Now, you can port this to project management:

• The prisoners are actually two project teams
• The police are the customer
• The crimes are different strategies that can be offered to the customer
• The sentences are rewards (or penalties) from the customer

And so the lesson is that the customer will often wind up with a sub-optimum strategy because either a penalty or reward will attract one or the other project teams away from the optimum place to be. Bummer!

There are numerous YouTube videos on this, and books, and papers, etc. But an entertaining and version is at the Khan Academy, with Sal Khan doing his usual thing with a blackboard and and voice over.

And, you can read Chapter 12 of my book: "Maximizing Project Value" (the green/white cover below)

---

Bookmark this on Delicious

Read in the library at Square Peg Consulting about these books I've written
Buy them at any online book retailer!

Read my contribution to the Flashblog

Game theory revisited

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John Baez, mathematician and blogger, has started a free course online about basic game theory. He's decided to post some of his class notes on his blog, Azimuth.

Here's Part I. And here's Part II.

By way of disclosure, I have a fetish with game theory for project management; it's Chapter 12 of my new book, Maximizing Project Value: A project manager’s guide, to be published this month.

Game theory
Game theory is all about strategic reasoning; it pits your ideas against those of your competition, your nemesis, or other project strategies. What it helps you do is forecast a likely outcome -- not necessarily a certain outcome. That is, if you do a series of moves and your counterparty does their own moves -- which may be similar or the same or none-of-the-above -- then where are you and your counterparty likely to come to?

Now naturally there are "games" -- scenarios really -- that are win-lose; but in project management situations we're more often interested in win-win, especially those that make the pie bigger as even the share of the pie changes a bit.

Especially we are interested in win-win when negotiating a competitive procurement. We want to win -- to be sure -- but we should also want the customer to win by selecting us over the competion. Indeed, in our proposal we have touted such an advantage: our win theme, the customer's view of our win strategy... select us because...

Strategy and counterstrategy
Haven't we all done something like this.... We want to minimize errors and maximize quality in the final project deliverables. Strategy: place incentives on the discovery and fix of errors. Counterstrategy (by the counter party, not necessarily ethical, but it happens): deliberately -- or sloppily -- cause an error and then 'discover' it, thereby earning an incentive.

Unfortunately, this happens all too often in the software business. With this incentive plan the original code can be done so quickly that there's no incentive to get it right the first time, even if not deliberate, since the developer will be paid an incentive to clean it up... something that should have been part of the development ethic in the first place. Thus, we have abetted the moral hazard of paying for risk that should not really be ours to pay for. (yes, I know I keep ending sentences in a preposition!)

The counter-counter strategy is to push the incentive downstream so that the incentive is on the quality of the final deliverable and not upstream on some piece or part. Then you are incentivizing the end and not the means. (Of course, there may be a counter-counter-counter strategy... this has a tendency to go on)

Game examples
Dr Baez develops some of the basic ideas in Part II with a description of several game ideas we're familiar with. Two of interest to project managers are "Chicken" and "Rock-scissors-paper"

Chicken:

In the game of Chicken two managers (or strategies, plans, events) are on a collision course. Each are driven on this course with the idea of overcoming the on-coming alternative. (Some view this as mindlessly stupid)  If there is a collision then it's possible that there is a loss for both and no one wins: lose - lose. And, the loss may be calamitous.. you could lose the company or the project.

It's anticipated, of course, that one party or the other will step aside or change course before the collision (or, in the popular vernacular: before going over the cliff).

Baez develops the game theory forecast for Chicken, a game that comes too often in politics and projects.

Rock-scissors-paper

Most parents are experts at this game, which is handy for enteraining children while waiting for the pizza to be delivered to the table.

Project managers may also be expert. The game is one of competing outcomes, each independently random as viewed by the counterparty. The outcome possibilites -- there are nine in a 3x3 matrix -- are individually scored as win-lose, lose-win, or a no-harm-no-foul tie among parties, respectively.

For example: in the outcome set of one party selecting paper and the other simultaneously and independently selecting rock, "paper covers rock", so paper wins and rock looses for that particular outcome.

This has some of the elements of Chicken without the calamitous collision possibility. The no-harm-no-foul tie outcome -- like paper - paper -- could be a win - win in some situations, but more often it's a suboptimum equilibrium wherein neither party is motivated to change, each party can live with the outcome, and the project can move on.

There's more
Needless to say: I'll say there's a lot more to game theory. You may also be interested in this very informative series on YouTube: Game Theory 101.

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