That’s Not How You Play The Game

 

Since it appears that I may be the only risk management contrarian here at ProjectManagement.com, I can’t let my readers down when it comes to challenging and refuting the fevered rantings (strikethrough) proffered hypotheses of the other side. The last two postings have been pretty strong, in my humble opinion. This one will be stronger still, with my posting for August 29^th being the ultimate risk management overturn. For the penultimate RM refutation, let’s turn to game theory.

Game theory is predicated on the idea that many real-world circumstances and situations are analogous to more controlled situations and circumstances, where the behavior of participants can be observed, quantified, and evaluated, with the superior strategies or tactics becoming discernible. Simply transfer those strategies and tactics to their real-world counterparts, and you’ve increased the odds of success, right?

Well, not always. As I discussed in my second book, (after which, incidentally, this blog is named) a favorite “game” of theorists is the Ultimatum Game. Here, two strangers, Player A and Player B, are approached by a person with an amount of money (typically $100 USD), who informs them that the money will be simply given to both players, but if and only if Player A, on the first attempt, proposes a split of the money that is acceptable to Player B. If Player A proposes a split that is unacceptable to Player B, then neither player receives anything.

The pre-game predictions of the theorists were fascinating. Their conventional wisdom held that, in order for Player A to maximize their payoff, the optimal strategy would be to propose that As receive $99, with Player B receiving just $1, on the grounds that, given the rules of the game, Player B would rather receive an unearned $1 than nothing at all, which would be the outcome should Player B reject Player A’s proposal. But something very interesting happened on the way to Player A depositing their $99 – in real-life iterations of the Ultimatum Game, Player B almost never accepted that division. There were, in fact, many observed instances of people rejecting 50-50 splits, or even 40-60.

In the investigation as to why the predicted outcome so dramatically deviated from the actual ones, several factors came in to play that hadn’t been anticipated.  For those that rejected the $99 to $1 split, common responses included a sense of resentment at being taken advantage of by Player A, or perhaps Player B simply didn’t believe that Player A was ninety-nine times more deserving of unearned money than Player B. Some individuals came from cultures that abhorred even the sense of being in debt to other people, and therefore rejected the 40-60 division in order to avoid being perceived as being in debt to Player A. The reasons for Players B to reject the division were myriad, but one thing was fascinatingly consistent: the 99-to-1 division, predicted to be the winning strategy, was the approach most often rejected. Faced with such a dramatic refutation of their calculated, “best” strategy, many game theorists simply attributed it to “cultural” factors which, obviously, could not be quantified or evaluated in deriving a superior strategy in the Ultimatum Game.

The parallels here with current risk management theory are striking. As I have often claimed in this blog (and in columns, keynotes, books…) there are simply too many factors involved in pursuing project goals to be able to capture, much less quantify, the data needed to calculate the odds and impact of future project-impacting events, much less calculate an optimal strategy for dealing with them. Compared to the number of decisions that customers, stakeholders, and the project team can and do make, the choices presented to the players of the Ultimatum Game are profoundly limited, to one choice each, and even here those ended up being two choices too many to quantify and calculate into a winning strategy. But, just as the game theorists could punt to incalculable “cultural factors,” so, too, can risk managers point to the existence of “unknown unknowns” when their techniques fail to deliver anything resembling a usable information stream. Convenient, no?

Keep in mind, then, if you are ever asked to participate in a rendering of the Ultimatum Game, don’t do as the so-called experts recommend, and propose the 99-to-1 split – it won’t work. Similarly, if you are playing the Project Management game, and your risk manager recommends a strategy based on his statistical analysis, don’t do it, because… well, you know.