Game Theory in Management

Last week’s blog, where I called out the Drake Equation as fraudulent using some of Michael Crichton’s material, I was asserting that much of what passes for management “science” is of a similar structure, and is also vulnerable to quackery.  “But Michael!”, you say, “didn’t you cover much of that in your recently-released, must-have book, Game Theory in Management?” Yes, I did, but I would like to pass along one very handy device for quickly ascertaining if you are being bamboozled by business-related pseudo-science, or not. This is an old device, and it’s very simple.

You ask Aristotle.

Remember that scene in Ghostbusters when Dr. Venkman (Bill Murray) first goes to Dana Barrett’s (Sigourney Weaver) haunted apartment? He goes over to the piano, lifts the key guard, and plays two high-pitched notes back and forth, in quick succession. “They hate this” he explains.  Well, start talking classical logic and Venn Diagrams to your typical management “science” prognosticator, and he absolutely hates it.

Now, real scientists love Aristotle. His ideas of logic are the underpinnings of the (real) scientific method. A theory is considered scientific if it has the following characteristics:

·         It is observable.

·         It is repeatable in an experimental setting.

Let’s take that basic tenant of the asset managers, that the point of all management is to “maximize shareholder wealth.” Interesting hypothesis, and very widespread – but is it scientific? If you were to Venn Diagram that assertion, that the point of all management (A) is (=) to maximize shareholder wealth (B), you would have two identically-sized concentric circles, A and B. So, if we were to present even one case of an A that was not a B, that assertion would be revealed as invalid, right?

Consider the hostile takeover. For some very silly reasons, the organizations and people who participated in this perfectly legitimate business tactic were vilified in movies and pop culture back in the 1980s, as if they were doing something borderline illegal, and certainly immoral.  A hostile takeover usually involves one company buying up the shares of a rival, with the intent of liquidating the rival’s assets and driving them out of business. With the elimination of the rival, the acquiring company hopes to increase market share, and perhaps eventually become more profitable.

Here’s the problem that the hostile takeover presents to the “maximize shareholder wealth” axiom. When a company becomes targeted for a hostile takeover, its stock typically jumps in value. The shareholders are confronted with two options if they believe (or even desire) that the takeover will take place: they can sell their suddenly inflated shares, or they can hold on to them in anticipation of what they will receive once the company is liquidated (in the event that the then-stock price was seriously devalued). In short, their wealth has been maximized. Therefore, no targeted company of a hostile takeover should ever resist, right?

Meanwhile, the acquiring company is having to expend resources in order to – well, do what, precisely? They’re not enhancing their own product line, nor benefitting employees, nor “maximizing shareholder wealth.” They’re actually striking a blow against their own shareholders’ wealth, since the target company’s prices are jumping artificially, but must still be acquired. Therefore, no acquiring organization should ever even attempt the hostile takeover, right?

In reality, though, hostile takeovers are undertaken all the time, and their targets typically resist. Clearly we have an episode of an A (point of all management) not equaling B. There are actually plenty of other examples, but, according to the rules of logic, we only needed the one. The management science tenet that the point of all management is to maximize shareholder wealth is invalid. Period. End of discussion.

I am now going to engage in a little less-than-scientific analysis myself. I can’t provide instances of direct observation of the following ideas, other than anecdotally, nor can I recreate outcomes in an experimental setting. But, based on my experience and research, the “maximize shareholder wealth” is only relevant in the realm of asset management, which, itself, only represents one of three main arenas in management science. The research (as well as the supporting logic) is spelled out in detail in my previously-mentioned, recently-released, must-have book.

But at least I’m not insisting that everyone acknowledge my assertions as management “science.”

Wow, has it been more than three weeks since I last mocked the asset managers’ (read: accountants’) approach to quantitative business analysis? I must be slipping. But getting these guys to stay in their epistemological place requires a certain constancy, so – once more to the breach, dear friends!

How do we know if any organizational or managerial pursuit is worthwhile? Why, the asset managers can tell us – it’s the Return on Investment, or ROI (yes, I know I’ve taken this on before. It’s just such an easy target, having been chronically oversold as it has). It is calculated so:

ROI = (Gain from Investment – Cost of Investment) / Cost of Investment

It’s all very simple, isn’t it? Simply calculate the ROI on anything, such as, say, the Project Management Office, and you have hard evidence about whether or not something is worth investing in, right?

As I discuss in my recently-released, must-have book, Game Theory in Management, the late, great Michael Crichton gave a speech entitled “Aliens Cause Global Warming[1], where he discusses the Drake Equation. The Drake Equation is:

N=N*fp ne fl fi fc fL

where N is the number of stars in the Milky Way galaxy; fp is the fraction with planets; ne is the number of planets per star capable of supporting life; fl is the fraction of planets where life evolves; fi is the fraction where intelligent life evolves; and fc is the fraction that communicates; and fL is the fraction of the planet's life during which the communicating civilizations live. As Crichton goes on to say, there is absolutely no way of knowing any of the parameters in this equation. What appears to be a “scientific” equation is actually structured speculation passing itself off as science.

Let’s revisit the simpler ROI equation. What’s the gain from investing in, say, lifeboats? There’s absolutely no way of knowing that. On board the QE II, they’re useless. On board the Titanic, they were priceless.  What’s the value of an Earned Value Management System (EVMS)? On projects that are successful, they may or may not have played a part in that success. On projects such as, say, the National Ignition Facility, where they were initially eschewed, an EVMS could have easily provided early warning on the massive overruns that project encountered – literally billions of dollars (USD) could have been saved.

Remember that scene from the movie Titanic, where the haughty Cal character is striding past the lifeboats, and actually strikes one with his cane, declaring “Waste of deck space on an unsinkable ship!”? How about the millions in taxpayer money that Carl Sagan finagled for the Search for Extraterrestrial Intelligence program, based on the fraudulent Drake Equation? That’s the type of analysis the accountants bring to your project meetings. It’s easy for them to “quantify” the “expected return” of doing project management, as well as its “cost,” and return a hard number indicating that their management information rivals over in the project management office represent a poor investment, or even a waste. So, you’ve got Cal, Carl Sagan, and your accountant, all lined up to provide you with actionable information for you to make key management and financial decisions, and there’s really only one question:

Are you going to listen to them?

This last January 8^th, David Schepp posted an article on AOL® Jobs entitled “Dish Network: The Meanest Employer in America?” In the article, Schepp examines some of Dish Network’s employees’ complaints about how their professional experiences have been, well, bad, due to the decisions of upper management at that organization. The AOL article cites a BloombergBusinessweek article by Caleb Hannan from January 2, describing some of the “draconian” tactics employed by Dish’s then-CEO, Charlie Ergen, including a fingerprint scanner replacing badge scanners for Dish’s Englewood facility access. Employees who were late – even by a few minutes, and even if they had put in 12 hours the day before – would trigger an automatic e-mail to the human resources department noting the late arrival.

As I discuss in my recently-released, must-have book Game Theory in Management, many commonly-held management concepts in use today have their roots in what is actually asset management, and are the theoretical children of the old axiom that the ultimate purpose of all management is to “maximize shareholder wealth.” Slavish adherence to the family of management concepts that are derived from this axiom lead to policies and tactics that are monumentally stupid, and do a lot more damage than just to an organization’s bottom line. In the cases of the unfortunate employees of Dish, both current and former, I would speculate that the dots were connected so:

·         The point of management is to maximize shareholder wealth.

·         Shareholder wealth is maximized when the organization’s assets are performing optimally.

·         Human resources are assets.

·         Optimally performing resources put in many hours, and are not late reporting to work.

·         Therefore, a valid function of management is to ensure the human resources put in many hours, and are not late reporting to work.

It all seems so logical, doesn’t it? But the entire argument’s structure is easily overturned with one simple intellectual exercise. Suppose you had a Dish employee who could completely execute all of the activities expected of the position, but did so in only 4 hours per day. Organizations not blinded by the asset managers’ take on reality would quickly recognize such a one as valuable, and probably seek to advance them within the organization. Other, less enlightened organizations would dismiss the employee for failing to put in more than 40 hours per week.

According to Wikipedia[i], the first reference to the term “going postal” was from a December 17, 1993 article in the St. Petersburg Times, where it cited that 35 people had been killed in 11 shootings associated with United States Postal Services’ facilities in the previous ten years. I would further speculate that certain vulnerable employees become so frustrated in attempting to get ahead in a system designed to ensure that the taxpayers’ money is never, ever wasted, that they arrive at a state of intellectual and professional despair, and employ murderously desperate remedies. Again, a focus on the performance of assets, I believe, led to a working environment that allowed management decisions to appear so rigid and disconnected from the macro organization’s mission that it literally drove the morally weaker elements of the workforce crazy.

And yet, the number of text books and business literature that are entirely predicated on the idea that the point of all management is to maximize shareholder wealth is legion. There’s a major sea-change coming in management science, and, when this Khunsian shift occurs, at its core will be the wholesale rejection of the many management science “truisms” foisted upon us by the asset managers (and, a little bit later, the risk managers). And I am so looking forward to this particular paradigm shift.

There’s just something about the New Year that inspires us to look back at the last twelve months, pick out the things that made us the angriest, and scheme about ways to get our revenge against those who…

Ha ha! Just kidding. We review our last twelve months of Variance Analysis Reports (whaddaymean you don’t do this? This should be a question on the PMP® certification exam: “Do you regularly spend part of the New Year’s Holiday reviewing your projects’ VARs?” Available answers:

·         Yes, it’s a good opportunity to learn from the Project Team’s successes and difficulties.

·         Actually, it never occurred to me. I think I’ll start doing that.

·         I guess this means you PMI® types expect me to be honest in my VARs.

·         Wow, you exam writers are real busybodies, aren’t you?)

…in order to see if some performance trend is emerging that perhaps went unnoticed in the tidal wave of project performance information cascading over your desk on a regular basis. But to seasoned Variance Analysis Report readers and writers, there’s a real art to teasing out the truth in a given project situation from the verbiage in a VAR, much like the reading population of the Soviet Union could read between the lines of Pravda, or Americans can with the New York Times. Some of the more common include:

Of course, this is only a partial list, and, as the financial advisor advertisements tell us over and over, past performance is no indicator of future returns.

Still, …

No month-long theme of evaluating the sources of project failure would be complete without at least some mention of that thorniest of sources, office politics. Most – if not all – of my readers have felt the sting of frustration that comes from seeing, say, a rival for a job posting spending time behind closed doors with a member of the selection committee (if not the boss herself), engaged in conversation or laughter. You just know that the gremlin politics is nudging aside its more straight-laced, conservative influence cousin, merit, and you also know there’s not a darn thing you can do about it.

Let’s start with a precise definition of office politics. Office politics are those interactions among members of the organization that are intended to primarily advance a personal agenda. Unless that particular personal agenda is exactly aligned with the macro-organization’s agenda (which it never is), a conflict of interest is introduced, and the larger organization suffers, however slightly. Ideally, all members of the team you work for would be pursuing the stated objectives of the organization. But, being human, our self-interest naturally comes in to play, and we occasionally find ourselves faced with decisions that may harm the larger group we’re in, but will benefit us specifically. Some level of inflating our accomplishments and minimizing our failures is natural; however, when a significant number of the members of the organization become adept at minimizing others’ accomplishments and maximizing others’ errors, a highly-politically charged environment is introduced into the workplace, and its effects can be devastating.

The lynch pin of the source of political influence is the internal narrative, or script if you will, that we all carry around inside us. As I discuss in my recently-released, must-have book Game Theory in Management, these scripts serve three purposes:

·         They tell us who we are to ourselves,

·         They tell us what to expect from others with whom we interact,

·         And they tell us to what we ought to aspire.

We begin writing these scripts the day we enter the world, and obviously well before we have any notions of causality, logic, or the rules of evidence. People who maintain scripts that are at stark contrast with reality, and provably so, are said to be delusional, but my take is that we are all to some extent, at least mildly delusional. To be forced to quickly rip out and replace nice or complimentary parts of our scripts with reality-based, harsher versions is an extremely painful process, as stock brokers throwing themselves out of Wall Street windows in late October 1929 attest.

Now, your office political movers and shakers know this, at least at an intuitive level. And they are masters at using their favorite tactic, the ex parte conversation, to introduce modifications to the decision-makers’ scripts. By “spinning,” or creating a story that seems to explain why past things unfolded the way they did, and, by extension, explains why the future should unfold in a specific manner, they are in a position to:

·         Maximize their successes,

·         Minimize their failures,

·         Maximize perceived rivals’ failures,

·         Minimize perceived rivals’ accomplishments,

·         And, most insidiously of all, weave it into the decision makers’ internal narrative in such a way that reinforces those parts of their narratives that make them feel good or confident about themselves.

It’s really quite a racket, for being as predictable as it is, this political maneuvering. Note that, in coming up with ways of overcoming or getting around the tainted decision-making process in a politically-charged environment, we have totally abandoned the idea of re-introducing a meritocracy. Not going to happen. Once the “top” salesperson is determined by a subjective selection process among executives, the actually sales figures hardly matter. The most successful code block generator has no shot against the lowest golf handicap. I could go on, but you get my point.

I could offer some fortune-cookie-ish advice on how to survive in a politically-charged work environment, but such environs differ to the point that any such advice would either not be helpful due to being too general, or worthless in your particular setting. I will say, though, that the Jungle Fighters among us do tend to reap what they sow, even if we’re not around to witness their comeuppance. Just hang in there, and don’t become one of them.