Life Lessons from Simple Games

Game Theory course teaches strategic leadership in JBU's MBA program

Friday, September 25, 2015

Rock Paper Scissors

Are there lessons for life that we can learn from studying simple games? Yes, and quite a few, as it turns out. “Game theory” – the systematic study of strategic interaction – has emerged as an important field of investigation over the past several decades. One of the insights we learn early in studying game theory is that many types of interaction in seemingly different situations end up looking very similar from a strategic perspective, when reduced to essential components. Let’s consider a few examples.

Rock, Paper, Scissors

Take the children’s game, “Rock, Paper, Scissors.” This classic, played in various forms around the world, teaches youngsters the importance of being unpredictable in certain strategic situations. Rock, Paper, Scissors is paralleled in a scenario I call, “Games Terrorists Play.” In real life, criminals and terrorists employ similar strategies to achieve their goals, unpredictably and randomly attacking unwitting victims. Perhaps less obvious, however, is the optimal strategic response to criminals and terrorists: to be effective – just like in Rock, Paper, Scissors – those combating the bad guys must also be unpredictable. Acting randomly can pay off; acting predictably can be fatal!

A Game of Chicken

In the film, Rebel without a Cause, James Dean famously plays a game of chicken, racing cars to the edge of a cliff, and then jumping out just before plunging over the edge. Too crazy for rational, mature people in real life, right? We would hope so, but actually, nations play games of chicken in international relations and military exercises all the time, as exemplified by the “Hainan Island Incident.” In 2001, a U.S. Navy airplane gathering intelligence near the coast of China was intercepted by Chinese fighter jets. While such encounters happen regularly, in this particular case, two planes collided, sending the U.S. aircraft to an emergency landing in China, while the Chinese fighter crashed into the sea, killing the pilot and causing a major international incident. Viewing incidents like this one through the lens of game theory helps us understand why seemingly crazy and entirely avoidable tragedies can happen, even as the result of fully rational behavior.

The Prisoner’s Dilemma

In the business world, competition frequently resembles a classic simple game – the “prisoner’s dilemma.” In this dilemma, two prisoners are being held in separate cells and asked to “confess” their crimes, and implicating their partner. Both prisoners will be well off if both remain silent, but each is given an incentive to confess: cooperating with the authorities and testifying against their partner will reduce one’s own punishment. However – and herein lies the rub – if both confess and implicate each other, they both end up worse off. Game theory shows why players are likely to pursue this strategy of confessing, even as it ends up making everyone worse off – and we begin to see how pervasive this kind of social dilemma is in life, affecting everything from cooperation in team projects to business competition.

Imagine two gasoline stations across the street from each other: both earn high profits by keeping their prices high, but each is tempted to decrease their price to attract more customers. In the end, both may end up lowering their prices, even as their profits dwindle – seemingly poor strategic decisions, but readily explained by game theory. When we combine game theory with a little economic analysis, we can use these tools to study optimal strategic behavior, such as how to respond to a rival’s price decrease or an increase in the rival’s advertising, and how much profit could be generated by cooperating with the rival. But of course we also learn about the risks of falling prey to a rival’s strategy or finding ourselves in violation of the antitrust laws!

In our graduate programs at JBU, courses like Game Theory and Managerial Economics combine to give us a set of analytical tools that help us understand behavior in both descriptive and prescriptive ways. First, our theory helps us understand why people, including those in business, behave the way they do; then, theory helps us understand and determine optimal best responses to the actions, or anticipated actions, of others. In learning to understand strategic behavior, we become better, savvier business people, comprehending and engaging the world around us.

Randall Waldron

 

Randall E. Waldron, Ph.D.
Soderquist Chair and Professor of Economics & International Business
Soderquist College of Business
John Brown University

Blog HomePosted By: Dr. Randall Waldron - 9/25/15 11:15 AM

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