More companies are using game theory to aid decision-making. How well does it work in the real world?
Alan Rappeport, CFO Magazine
July 15, 2008
Game Theory can work despite irrational human behaviour and if it is clashing with DCF analysis, this is more likely down to incorrect assumptions on one or both sides. It is simply a question of building in the likelihood of irrational behaviour into the game assumptions. More often than not, creators of DCF analysis take far too narrow a view and fail to capture all likely income and cost flows over the longer term, including quantifying the likelihood of different scenarios arising. If properly done, DCF and game theory should go hand in hand. At the end of the day, Game Theory is a fancy way of saying managers should look at and quantify all possible scenarios which could arise as a result of their own decisions and those of their competitors, suppliers, customers, shareholders and all other stakeholders and that they should reassess their position continuously over time, particularly after key events and milestones. It is valuable as a tool to show managers and stakeholders the possible outcomes which they may be failing to see but essentially it is formalising and documenting what good managers do as part of their daily decision making process.
Posted by Salar Farzad | August 25, 2008 08:47 am
Game theory works! We have been using a form of game theory - competitive wargaming - with selected clients to help them acquire new customers, and to protect existing customers from competitors. It works in a big way - we've help our clients acquire over $2 billion in new business, plus avoid competitive losses of more than $100 million.
Posted by John Kirwan | August 15, 2008 10:56 am
Although I was quoted saying game theory is a secret strategic weapon, I think a better "weapon-based" analogy is "another arrow in our quiver of decision-making tools". We don't envision or use game theory as a weapon. Although oil and gas is a very competitive business, it is characterized by large capital joint ventures. Most of our major ventures are complex partnerships with other oil & gas companies and governments. In order to be successful we must find a way to cooperate and find "win-wins" among multiple parties with diverse, sometimes opposing objectives. It is in this arena where we find the greatest benefit in using game theory. It helps us to better find solutions that allow us, along with our partners, to succeed.
Posted by Frank Koch | July 16, 2008 10:20 am© CFO Publishing Corporation 2009. All rights reserved.