Game Theory in Management

In last week’s blog I asked whatever happened to “life cycle estimating,” and essentially made the point that it was a management fad, similar in performance and (ironically) life cycle to other management fads. Conventional wisdom holds that whether or not a given hypothesis in the management science realm is valid or a craze is the proverbial test of time – if a business model theory is valid, it will probably make its way into a significant percentage of companies – but even here some invalid but long-lived hypotheses can become regarded as theories, taught by colleges and adapted by many (if not most) organizations. This state of affairs afflicts the management world more acutely than others due to the near-impossibility to conduct a controlled-environment experiment – there are simply too many parameters to identify, much less quantify or control, in the free, open, and competitive marketplace. So, what’s the reading PM population, exposed to hundreds of guidance documents, journal articles, and, yes, blogs, to do when evaluating all of these ideas? I believe I have a usable tool for performing such a discernment: the null hypothesis.

According to Ann Marie Helmenstein, PhD,

In a scientific experiment, the null hypothesis is the proposition that there is no effect or no relationship between phenomena or populations. If the null hypothesis is true, any observed difference in phenomena or populations would be due to sampling error (random chance) or experimental error. The null hypothesis is useful because it can be tested and found to be false, which then implies that there is a relationship between the observed data.[i]

As an example, let’s look at one of the aforementioned long-lived and widely-accepted theories that’s being taught at business schools and has been broadly used throughout many industries, but is, in my opinion, invalid, that the point of all management is to “maximize shareholder wealth.” Can this statement’s null hypothesis be disproven? If “maximize shareholder wealth” had a null hypothesis, I would posit that it would be “there exists several valid management techniques that are highly beneficial to the organization that have a negative impact on that organization’s shareholder wealth.”

Consider the following payoff grid:

Let’s dispense with Scenario C right off the bat. Any management action that harms the organization and decreases shareholder wealth is patently invalid. Similarly, I think we can all agree that Scenario B represents good management.

But to disprove the null hypothesis as stated, one would have to prove that both Scenarios A and D are empty sets, i.e., there are no valid management techniques that benefit the organization while decreasing shareholder wealth, or that the original assertion should have been re-phrased as “maximize shareholder wealth, even if it harms the organization.” Is it true that the A bin is empty, or the original theory cannot stand as phrased?

As for Scenario A, consider a new business. Its owner(s), technically speaking, deplete shareholder wealth beginning the accounting period after they have purchased inventory, due to depreciation. But this effect carries on beyond mere accounting nuance: typically, new businesses’ owners will work themselves excessively, with little or no recompence, in the effort to attract customers away from the competition. Sometimes they will mark down their inventories to cost, or even below, in order to attain market share, a widely-used tactic that, by definition, decreases shareholder wealth. Then there’s my oft-referenced example of the hostile takeover, where the acquiring business will often take a significant hit to their reserves and share price, while the target organizations will almost always see an increase in shareholder wealth. And yet, the organizations performing the takeover do so fully expecting this to happen, and the target organizations will typically resist. If Scenario A is empty, how does one explain these observable phenomena?

Strategies that fall in to Scenario D are common, from “going out of business” sales to actions that can lead to a “piercing the corporate veil.” According the The Balance Small Business website,

Corporations are separate entities from their shareholders, and in normal circumstances, if a corporation is sued, the individual shareholders and officers cannot be brought into the lawsuit. But there are cases in which the corporation's officers and shareholders could be sued for negligence or for debts; the action of bringing in these shareholders to be sued is called "piercing the corporate veil" or "lifting the corporate veil."

In the same way as corporate shareholders, the owners of a limited liability company (LLC), called "members," may also be sued personally for business debts and actions.[ii]

Given these observable management phenomena, Scenarios A and D are not empty sets; therefore, the null hypothesis is not disproven, indicating that a basic tenet of business school teaching is likely invalid.

So, that’s my management fad litmus test: just ask yourself, for any given hypothesis, has its null hypothesis been disproven, or even articulated? If not, you may want to be wary of participating in a fad.

[i] Retrieved from https://www.thoughtco.com/definition-of-null-hypothesis-and-examples-605436 on May 23, 2021, 17:50 MDT.

[ii] Retrieved from https://www.thebalancesmb.com/piercing-the-corporate-veil-definition-398410 , May 23, 2021, 18:23 MDT.

GTIM Nation knows of my theory that there are three kinds of management, each with its own goals and Management Information System (MIS) needs:

• Asset Management seeks to “maximize shareholder wealth,” and uses the General Ledger as its main information source,
• Project Management (yaay!) is all about accomplishing the customers’ goals of scope, within their constraints of cost and schedule (the famed “triple constraint,”), using Earned Value and Critical Path information, and
• Strategic Management targets greater market share, which is a company’s income divided by its industry’s total revenue, and use all of the tools from the marketing industry to advance towards that goal.

Meanwhile, Back In The Movie Industry…

I want to talk about movies that have as a key component an aspect of these types of management. First up, let’s take a look at The Accountant (2016), a film that has, yes, a forensic accountant as its central character and protagonist. But this is no ordinary accountant, no siree. This accountant is not only brilliant, but is advanced in the martial arts, is an art connoisseur, and is physically attractive. The character is, in fact, played by none other than Ben Affleck – think of Batman as your genius accountant, and you have a good grasp on this character. The Accountant is an action-adventure film, as Affleck’s character uncovers massive amounts of evil-doing and evil-doers, who, naturally, want to kill him and his loved ones. I’m going to go out on a limb here and assert that the vast majority of Certified Public Accountants do not have, as a significant component to their everyday professional lives, an aspect of immediate physical danger, or at least not one that requires advanced martial arts capabilities in order to survive day-to-day. Indeed, when it comes to likely protagonists for action-adventure movies, the typical lists include secret agents, military personnel, police officers or private detectives, mutants, aliens (Superman), and even children seeking to become famous guitar players (Coco, 2017) – but accountants, in general, do not immediately pop to mind when one considers jobs that entail ubiquitous personal danger.

The next movie sort-of deals with Strategic Management. Pretty Woman (1990) is a romantic comedy, starring Richard Gere and Julia Roberts as a “high-powered corporate raider”[i] and a prostitute, respectively. As described (rather disingenuously) in the movie, corporate raiders seek to obtain a majority share in struggling companies, then force them in to bankruptcy in order to sell off their assets, presumably for more value than was paid to obtain the majority share of stocks. But this is a rather naïve view of the purpose of “corporate raiding,” also known as a hostile takeover. If a profit could be made from simply buying out companies that appeared to be “undervalued” based on their balance sheet, then it wouldn’t happen nearly as often as it does. The key component receiving short-shrift here is market share. It’s obviously valuable, but can’t be quantified in the general ledger as an asset – otherwise, it could be taxed. By buying out a competitor and either assuming or liquidating its assets, the organization performing the takeover frees up market share. It’s why performing a hostile takeover remains attractive even in those instances where the price per share jumps up (as it almost always does) to the point that the acquiring organization takes a loss in their own books. And yet, here’s a highly prominent movie, with A-list Hollywood stars, based on a misinterpretation of basic Strategic Management goals and techniques.

Meanwhile, Back In The Project Management World…

Which brings us to Project Management. Where’s our movie? We wouldn’t even have to stretch its predicate to anything as improbable as accountants being the first line of detection for massive funding of terrorists, or “corporate raiders” performing a business model analogy to being a prostitute.  I readily concede that first-rate movies have been made about famous projects (e.g., Fat Man and Little Boy, 1989), but project management itself has not garnered a treatment analogous to the other two types of management.

Besides, PM is way more dangerous to implement than Asset Management. Don’t believe me? Watch what happens when a PMO Director mandates that all PMs are required to have filled-out and signed Work Packages prior to starting work! PM is also way more virtuous than Strategic Management. Just watch a few episodes of Mad Men, and compare those goings-on to your own PMO. I think PMI® Publishing should stop with the academic analysis stuff for a little while, and send out a call for movie scripts that highlight PM. No, I don’t want any renumeration from the Institute for this brilliant, potentially millions-making idea.

I would, however, like for my character to be played by Ben Affleck.

[i] Wikipedia contributors. (2021, May 15). Pretty Woman. In Wikipedia, The Free Encyclopedia. Retrieved 01:42, May 17, 2021, from https://en.wikipedia.org/w/index.php?title=Pretty_Woman&oldid=1023299360

GTIM Nation is well aware that, in my self-appointed role of defense-against-management-fads guard dog, I have snarled at, barked at, and thrown up on several popular initiatives, mostly contra risk management (no initial caps), misapplication of Generally Accepted Accounting Principles, and those who would eschew Earned Value’s capability to produce an Estimate at Completion (EAC) in favor of using burn rates, or re-estimating remaining budget and adding that figure to the cumulative actual costs. Despite my reasonable opposition, unfortunately, these practices have yet to be roundly denounced or, better still, jettisoned from and ignored by the community of management scientists writ large. So, when a management fad does actually receive the left-behind treatment, I think it’s illustrative to go back and see what all the original fuss was all about, how the fad gained traction, and what ultimately led to its demise, particularly and especially if the fad was largely germane to the Project Management world. Such an example is the “Life-Cycle Cost Estimating” craze.

Just so everyone’s clear on what’s being evaluated here, according to acqnotes.com,

A Life-Cycle Cost (LCC) is the total cost of a program from cradle to grave. (also referred to as Total Ownership Cost (TOC)) LCC consists of Research and Development (R&D) Costs, Investment Costs, Operating and Support Costs, and Disposal Costs over the entire life cycle. These costs include not only the direct costs of the acquisition program but also include indirect costs that would be logically attributed to the program. In this way, all costs that are logically attributed to the program are included, regardless of funding source or management control.[i]

My recollection is that Life-Cycle Estimating or Life-Cycle Cost first became a thing in the mid-1990s, and internet searches for papers on the topic show a sudden increase in titles published late in that decade. While perhaps noble in purpose, its stated goal of returning the “total cost of a program from cradle to grave”[ii] is impossible, as a couple of thought experiments will demonstrate.

Consider two (American) football stadiums: Soldier Field in Chicago, home of the Chicago Bears, and the Seattle Kingdome, home (for a time) to the Seattle Seahawks. I’ll contrast them so[iii]:

To further quantify the differences between these two projects facilities, consider the variance between them if each had had just one game, which sold out, per year, and that the ticket price was an inflation-adjusted $10 (USD), and that this was the sole source of revenue. What would have been the result?

Soldier Field:    $64,935,680

Seattle Kingdome: $15,180,000

…or, a delta of $49,755,680, which represents a whopping 62% advantage to Soldier Field, and even that figure gets larger each year Soldier Field stays open. I wonder what the respective Life-Cycle Estimators would have had to say at the project’s kickoff meeting had they been asked about each facility’s Return on Investment.

The second thought experiment that I would like to propose is based on the parameters needed to generate the “Life Cycle Costs.” From the definition in the first paragraph, these include:

• Research and Development
• Investment
• Operating and Support
• Disposal

Prior to project initiation, none of these improbably reduced number of parameters can possibly be known, or even estimated to any reasonable degree of precision (“…regardless of management control”? Puh-leeze). And yet, here’s the Life-Cycle Estimating crowd not only laying claim to an ability to perform such a capture, but actually asserting that such an “analysis” ought to be part of PM strategies going forward.

So, how did Life-Cycle Estimating become popular? I think it’s because of its implied (?) claims to be able to reasonably quantify far into the future, an ability that would automatically enrich any of its practitioners. With such a potentially beneficial capability, sprinkled with officious-sounding jargon, how could it not gain immediate and widespread recognition, if not complete acceptance, within the management science realm?

Did Life-Cycle Estimating end up going away, like other management fads? Sort of. There are still recent papers being published (not to be confused with a recent offering from my esteemed colleague Elizabeth Harrin, who blogged about the life-cycle of the estimate itself), but it seems to me that it doesn’t receive nearly the attention it did a decade or two ago. It may well be that it’s finally dawning on people outside of GTIM Nation that the future cannot be quantified. Not by risk managers, and not by estimators.

It’s why the term “precise estimate” is an oxymoron.

[i] Retrieved from https://acqnotes.com/acqnote/careerfields/life-cycle-cost-estimate on May 9, 2021, 18:38 MDT. This source cites the source of the quote as the Defense Acquisition Guidebook (DAG).

[ii] Ibid.

[iii] Wikipedia contributors. (2021, May 7). Kingdome. In Wikipedia, The Free Encyclopedia. Retrieved 01:57, May 10, 2021, from https://en.wikipedia.org/w/index.php?title=Kingdome&oldid=1021985574 and Wikipedia contributors. (2021, May 9). Soldier Field. In Wikipedia, The Free Encyclopedia. Retrieved 01:58, May 10, 2021, from https://en.wikipedia.org/w/index.php?title=Soldier_Field&oldid=1022224914

Avatar: The Last Airbender was an American animated television show that first aired in 2005. In the show’s world, the map is divided among four nations, each associated with a basic element – earth, air, fire, and water. Certain rare individuals within these nations can “bend” those elements, which most closely resembles telekinetic manipulation. The protagonist, an airbender named Aang, is a boy who also happens to be the Avatar, or the once-in-a-generation person capable of bending all four elements. His world is in a state of conflict, as the Fire Nation has taken advantage of the Avatar’s apparent absence to launch a campaign to rule all of the other nations. Aang must quickly master all of the other elements and confront Fire Lord Ozai before he realizes those goals. My then-teenaged son got me interested, and then hooked on this series, and I’m glad he did. It’s well-written, beautifully drawn, and the voice actors are exceptional (fun fact: Fire Lord Ozai was voiced by Mark Hamill). The opening sequence of each episode synopsized the benders’ world in a monologue voiced by the Katara character, so:

Water. Earth. Fire. Air.
Long ago, the four nations lived together in harmony. Then, everything changed when the Fire Nation attacked. Only the Avatar, master of all four elements, could stop them, but when the world needed him most, he vanished.

Meanwhile, Back In The Project Management World…

In the Project Management world of long ago, there were eight nations – four primary, four secondary. The four primary nations were … well, let me put it this way:

Scope. Cost. Schedule. Risk.

Long ago, the four nations lived together in academic harmony. Then, everything changed when the risk managers (no initial caps) asserted supremacy, as evidenced by the following definition of Project Risk Management by toolshero.com:

Project risk management is the process that project managers use to manage potential risks that may affect a project in any way, both positively and negatively.[i]

(Note: toolshero.com isn’t the only place where risk management[ii] is so defined.) Only a PM Avatar, master of all four management aspects, could stop them, and return an overarching structure with proper proportion and perspective to the management world.

The keen observer (the entire population of GTIM Nation) will note that the toolshero.com definition excludes absolutely nothing in the management realm – hence the analogy that the risk managers were attempting (I think they’re still at it) to assert that all management fell under their purview, similar to the obviously flawed notion that the point of all management is to “maximize shareholder wealth,” the banner under which our friends, the Asset Managers previously attempted to take over the management world.

So, what is it that makes the one who has mastered the PM basics almost magically powerful in comparison to the other management-style benders? I think it has to do with the ossified codex of business rules with which the non-PM-types have been burdened by their business school professors. The rules that these carry around with them, like Jacob Marley’s ghost’s chains, include:

• The aforementioned “the point of all management is to maximize shareholder wealth,”
• …as well as the notion that risk management[iii] pertains to all project events, positive or negative,
• That good communications management involves informing all “stakeholders” of every aspect of project execution,
• the notion that a Return on Investment analysis, and its resulting numerical value, is an effective (or even optimal) parameter for evaluating which projects belong in a planned portfolio,
• Or even that the best way of generating an Estimate at Completion (EAC) is to re-estimate a project’s remaining scope, and add the cumulative actual costs.

Conversely, Project Benders are fully aware that:

• Asset Managers seek to maximize shareholder wealth. PMs and Strategic Managers have different agendas, and attendant management information streams,
• “What is nonmeasurable and nonpredictable will remain nonmeasurable and nonpredictable … no matter how much hate mail I get.”  --Nassim Taleb, Antifragile: Things That Gain from Disorder, 2012, pp.138.
• Among “stakeholders” are those who seek to slow or even stop your project, and sharing your insights with these people is dopey,
• ROI is irrelevant when it comes to Strategic or Project Management, and
• Only Asset Managers use this technique. Project Benders know how to calculate EAC.

Unlike their Last Airbender counterparts, Project Benders don’t employ the flowing, martial arts-inspired gestures when they perform their magic (at least not the ones I’ve seen). But make no mistake: as PM-centric techniques and theories continue to gain ground in the realm of Management Science, much of what passes for legitimate practices will be challenged, proven to be sub-optimal, and eventually overcome.

I’m just hoping that, when the animated version of this story comes out, my character will be voiced by Mark Hamill.

[i] Retrieved from https://www.toolshero.com/project-management/project-risk-management/ on May 2, 2021, 15:40 MDT.

[ii] No initial caps.

[iii] Ibid.

When an author attempts to advance a theory under the auspices of Management Science using obvious sophistry, I immediately know two things:

• The theory has not been proven, or even logically advanced past the hypothetical phase, and
• Any practitioner of the legitimate hard sciences is fully justified in rolling their eyes clear to the back of their heads whenever they hear the term “Management Science.”

Of course, many instances of sophistry are difficult to detect, at least right away. Not so the case with the straw man argument, no siree. This is where the theoretical position opposite the assertion being advanced is set up, but not accurately, then criticized to oblivion. And this is exactly the tack being taken with much of the advancement of earned schedule (like “risk management,” I refuse to use initial caps for this term).

What is “earned schedule?” Well, from the self-proclaimed “official site for Earned Schedule,” we see this:

Earned Value Management (EVM) is a wonderful management system, integrating in a very intriguing way, cost …schedule …and technical performance. It is a system, however, that causes difficulty to those just being introduced to its concepts.  EVM measures schedule performance not in units of time, but rather in cost, i.e. dollars.  After overcoming this mental obstacle, we later discover another quirk of EVM: at the completion of a project which is behind schedule, Schedule Variance (SV) is equal to zero, and the Schedule Performance Index (SPI) equals unity.  We know the project completed late, yet the indicator values say the project has …perfect schedule performance!![i]

In just these five sentences we can begin to see the vacuousness of its underpinnings. Quick question: why does the author feel the need to refer to EVM as “wonderful” and “intriguing?” Also in the first sentence, the author doesn’t understand how to use ellipses, twice interjecting them for commas, and don’t get me started on multiple exclamation points. Does that last objection sound like nit-picking? Maybe so. I just have a hard time taking advice on how to better manage hundreds of thousands of dollars’ worth of projects (if not millions) from a person who hasn’t mastered eighth-grade English.

The third sentence points out that Earned Value Management (EVM) measures schedule performance in units of cost. Umm, yeah, that’s what EVM does. If you want to measure schedule performance in terms of time, which earned schedule claims to do, then the traditionalists would turn to – Critical Path! That’s what CPM does. In another document, generated by a certain guidance-document-generating organization that I refuse to name, the example given for earned schedule has to do with reducing plans to meet friends for dinner to PM terms. The story problem stipulates that, at your current rate of performance, you will be late to a dinner with friends, and goes on to mock the idea that you would contact them to announce that you will be X “dollars late.”

But this is a straw man argument, and, therefore, invalid. When an EVM system returns that one will be $X late, it doesn’t mean that time equals money (though some would argue the contrary). It simply means that, if you want to arrive on-time to your dinner date, you should be prepared to spend $X over and above what you had originally budgeted to make that happen. Variances at Completion expressed in units of time are not properly derived from an EVMS – again, they come from Critical Path Methodology systems. It is, in fact, their raison d’etre. And yet the earned schedule crowd seems to assert that this new technique has bridged some previously-unsolvable management information gap. It’s simply not so.

Another straw man argument from the excerpt above challenging EVM and its schedule performance metric has to do with the fact that the Schedule Performance Index (SPI, or the cumulative Earned Value amount divided by the time-phased budget), in a “quirk,” moves toward 1.00 as the project comes to completion, regardless of whether or not it is finishing on-time. Again, this is an irrelevant observation. The SPI simply measures progress against the baseline; of course it’s going to close in on 1.00 as the project nears completion. There’s no “quirk” about it. You want a performance measure that compares a projected finish date to the original baseline date? That comes from the CPM system, and for experts to blithely fail to take this into account is sophistry.

I understand that the concept of earned schedule has received a lot of attention and accolades in the PM world. So has risk management. So has communications management. I also understand that it only took a random Cairn Terrier to pull back the curtain on the Wizard of Oz.

[i] Retrieved from https://earnedschedule.com/ on April 25, 2021, 18:45 MDT.