Game Theory in Management

I remember reading about one aspect of human intelligence having to do with the ability to encounter novel situations and dealing with them appropriately by remembering a similar circumstance, and either engaging the actions or decisions (with or without some level of adaptation) that were made in the recalled instance that resulted in a successful outcome, or avoiding those decisions that ended in failure. This aspect is actually the basis for the utility of Game Theory. When we learn about the Nash Equilibrium in, say, the Hawk/Dove Game, we’re not studying the various scenarios involved in order to get a handle on the amount of food ingested by a population of entirely fictitious birds, as fun as that might sound. No, the point of performing this type of analysis rests entirely on the assumption that, at some level and capacity, the interactions of the particular games’ players are analogous to real-life interactions among human players, typically in a business setting.

Some of these games can have a strong analogous relationship with their real-life counterparts. In the movie Midway (2019), a scene has Admiral Yamamoto walk in on a war game conducted by Admiral Nagumo, who is sharply criticizing his junior officers for not following some of the basic guidelines stipulated at the beginning of the game. Yamamoto asks for an explanation, and one of the offending officers explains that they had arranged for the American carrier forces to be positioned northeast of Midway, and from that vantage point those forces had surprised and sunk three of the four Japanese carriers. Nagumo points out that the only way the American forces could be so positioned would be if they had advanced notification of the Japanese intent, which was held to be an impossibility. Yamamoto orders them to re-start the war game, this time working under the assumption that the Americans did not know the Japanese intent, and could not position their forces accordingly. Of course, at the actual Battle of Midway, the Americans had intercepted almost the entire Japanese order of battle, their carrier forces were positioned northeast of Midway, they did surprise the Japanese forces, and actually sank three of the four carriers in the first attack wave.

Conversely, I also remember reading an article that described the reasons why the Tit-for-Tat strategy is so successful in multiple iterations of the Prisoner’s Dilemma, and then went on to use that analysis as an explanation for why entire nations go to war. While the Prisoner’s Dilemma may be the go-to game for analyzing cooperation and defection among non-related biological units in a common environment, I’m not at all sure insights gleaned from it can be reliably used in identifying appropriate geopolitical conflict strategies.

Even within some of the games, extracting an insight on a usable approach can prove to be very tricky. Take the Ultimatum Game as an example. In this game, the researcher/game coordinator approaches two people (who presumably know each other) with the following offer: he will give them $100 (USD) if Person #1 can propose how the money will be distributed among them and have Person #2 approve of that distribution scheme on the first try. Some Game Theory experts predicted that, in order for Person #1 to maximize their payout, they should name a distribution of $99 for themselves, and only $1 for Person #2, on the grounds that Person #2 is essentially looking at receiving either $1, or nothing at all.  When this game was tried with real people, however, that distribution was virtually never accepted. Instead of taking away from this the rather obvious challenge to the Economic Man theory (that people are rational, and will always act in their own self-interest), analysts were content to blame other factors, such as “culture.” But that’s the real irony here – that the results of using the 99-to-1 strategy, predicated on the Economic Man theory, failed repeatedly, meaning that, apart from the obvious takeaway, this game really had very little similarity to its real-life application. It wasn’t very analogous at all. 

I can almost hear GTIM Nation now: “Actually, Michael, you’re the only person I hear going on and on about Game Theory, suitable to the business environment at hand or not.” Fair enough. But the decision-makers who are carrying with them ideas, strategies, and business models that may or may not be applicable to their new surroundings aren’t announcing their thought processes as pertaining to Game Theory per se. They’re usually working off of a combination of education and experience. I can’t count the number of times I’ve encountered a new manager or co-worker who makes it a point to describe how “things” were “done” at their previous assignment, to great success, slyly cruising past any discussion of (1) if things were so swell at their previous assignment, why did they leave?, (2) even within the previous environment, was any thought given to evaluating (much less scoring) other ideas, strategies, or business models to help ensure the one used was the optimal one?, and (3) why is this person convinced that, even if the previous questions could be answered satisfactorily, the current situation be considered analogous to the point of an idea/strategy/business model being given the assumption of automatic success?

Strategies gleaned from previous successes are great, when the circumstances re-present as highly analogous to that managerial victory. When the analogy is weak, however, the new parallel being drawn may very well be sort of exactly like failure.

Sherlock Holmes was known for being taken by surprise by references his associate, Dr. Watson, would make to what could probably be best described as pop culture in Victorian England. Should Watson express amazement that Holmes would be ignorant of such things, Sherlock would explain his desire to not occupy his mind with trivial things in order to maximize his effectiveness as a consulting detective. If one could isolate the kind of mental filter that would function as a differentiator between data items that contribute to Holmes’ infamous deduction capabilities and ones that do not, I believe that such a filter could have but one name: relevance.

Meanwhile, Back In The Project Management World…

GTIM Nation may be aware of one of my favorite axioms, “All things fail by irrelevant comparisons.” Combine this with one of Hatfield’s Incontrovertible Rules of Management (#22):

All useful management information has the following three characteristics:

• • It is accurate,
  • It is timely,
  • …and it is relevant.

This is what irks me about much of what passes for insightful management techniques, particularly within the PM domain. They can be rather irrelevant. What should be the test for relevance, at least within PM space? I think simply asking the question “does this (technique, information stream, business practice) help bring the project in on-time, on-budget?” is a great starting point. While asserting that this question is simple, I also readily acknowledge that discerning relevance is multi-layered. Prior to using it as a management technique litmus test, let’s add one key element of structure, the old saw “Quality, Availability, Affordability: pick any two” (original author unknown). With this structure and question in-hand, let’s take a look at some business practices that may or may not have been relevant.

First up: Six Sigma Quality Management. Six sigma shows up on quite a few lists of “worst management fads” when those words are entered into a search engine, and for good reason. Far from being universally applicable, there are actually many scenarios where committing significantly greater resources into the quality a given service or product could be harmful to that organization’s health. Besides potentially contributing to scope creep (and thereby endangering an on-time, on-budget completion), an organization that succeeds because of the affordability and availability of its output may well be making a significant error in moving towards a high-quality product. In all likelihood, such an organization would be already known for providing affordable, available services or products, meaning that, even if they should move towards higher quality, the output would not necessarily be seen as such. Imagine your favorite fast-food chain suddenly offering rib eye steaks. See what I mean?

Next, I want to use our little two-tiered test with our friends, the Communications Managers. Even if one could argue that their engage-all-stakeholders strategy could help attain project objectives indirectly, by intercepting potential barriers erected by people who would not have otherwise opposed the scope had they only been informed of it earlier in its development cycle (a tentative take, at best), it also works against organizations that have the foresight to select whichever of the two of three targeted characteristics for their overall strategy. For example, if you were to launch an organization that could produce, say, a top-quality acoustic guitar for the same price as those companies producing low or mid-priced instruments, how anxious would you be to let people outside your organization (the very definition of “all stakeholders”) know exactly how you pulled it off? Such information is referred to as “trade secrets” for a reason, and releasing it to a broader set of people than is absolutely necessary in order to feel good about your enlightened approach to management is, in my opinion, a really bad idea.

For our last entry in the deducing-relevance sweepstakes, I’ll address one of my favorite targets, the risk managers (no initial caps). For this evaluation, we don’t even need the second-tier filter/test, since it flunks the first: I defy any risk manager to quantify how a risk register assists the PM in bringing in the scope, on-time, on-budget. Show me the PM who has spent real coin on the risk management function, and I’m confident that there’s going to be a customer who wants (or even requires) such an analysis. I have yet to meet the PM who, left to their own devices, would bother with the whole Monte Carlo schedule analysis schtick, or even consult it prior to making key decisions in the case of one being foisted upon them.

Meanwhile, Back At 221B Baker Street…

It’s my contention that, by using the two-tiered test of (1) asking the question “does this help bring the project in on-time, on-budget?” and (2) identifying how the proposed technique/strategy fits in the Affordable, Available, Quality: pick any two framework, many irrelevant business practices can be filtered out of the PMs’ repertoire, thereby enhancing the odds of identifying the killer optimizing the project’s technical approach. So, you see, it’s really rather elementary.

The television series Mighty Morphin Power Rangers was something of a phenomenon in the 1990s. It was a superhero genre show which featured a selected group of teenagers who could, by holding up a disc-shaped talisman and stating which “zord” (a large fighting vehicle designed to resemble a specific animal) they are invoking, instantly change into a Power Ranger costume and commence using their martial arts skills to defeat evil. Many of their episodes followed some variation of the following template:

• Presentation of some minor conflict having to do with the Rangers’ school lives,
• the introduction of normal-sized antagonists (typically dispatched by Rita Repulsa, but not always) who create mayhem,
• the Rangers transferring into their Power Rangers personas,
• the Rangers overcome the normal-sized antagonists in hand-to-hand fighting,
• the antagonists regroup and launch an attack on downtown Angel Grove, California, using an extremely large zord,
• requiring the Power Rangers to invoke their own zords, and combine them into a Megazord, and defeating the antagonists,
• leading to the denouement, where the teenagers get on with their lives, many times at the local juice bar,

…all while Angel Grove’s downtown area remains remarkably intact. An additional detail: in most of the episodes, two non- “morphin” teenaged characters, Farcas Bulkmeier and Eugene Skullovitch, known as “Bulk” and “Skull” respectively, originally presented as bullies and antagonists for the Power Rangers in their high school student personas, would eventually serve as humorous relief in the franchise. I’m noting this detail for future blogs, when it becomes appropriate to refer to some PM trend as the “Bulk and Skull” of management science. For those members of GTIM Nation who have never seen an episode of MMPR, the previous description, no doubt, appears rather bizarre, and I readily admit that, re-reading it myself, it is strange to the point of defying description.

Meanwhile, Back In The Project Management World…

While most PMs that I know do not overtly fight against berserkers dispatched by Rita Repulsa, many of them are engaged in an epic struggle against poor managerial decisions undertaken by those who present as if they are pursuing on-budget, on-schedule scope delivery, but know little or nothing about PMI®, or the PMBOK Guide®, much less how to set up a valid Work Breakdown Structure (WBS). If the struggle was just against ignorance, that would be one thing; however, this conflict is not just against a lack of expertise; it’s opposing obviously sub-optimal alternative managerial approaches, usually originating from the realm of the Asset Managers. How do you know if you are encountering one of these business model berserkers? Some clues include:

1. Attempts to perform cost performance analysis based on actual costs burn rates,
2. …based on Organizational Breakdown Structure (OBS) elements rather than the WBS.
3. Uses action item lists as a substitute for a valid schedule.
4. Documents “risk events,” adds guesses estimates of the odds of their occurrence and cost/schedule impact, and uses this “risk register” as a stand-in for Earned Value / Critical Path-derived performance data.
5. They dress in grey unibody spandex-like clothing and emit odd whooping sounds,

…no, wait, that last bullet would be the “putties” from MMPR, though they do have an odd resemblance to some of the anti-PM-types I’ve encountered. What’s an opponent of bad management strategy to do in these cases? One approach would be to invoke your Mighty Morphing (I insist on adding that missing “g”) Power Skills, for example:

1. If you encounter the “burn rate” EAC, say “Earned Value Management (pause) provides a method of calculating the EAC that’s far more accurate.” By inserting the pause, it’s almost as if you are invoking a PM-themed zord.
2. If the thing being managed is an organization rather than a project, respond with “Scope Management (again, pause) techniques offer a superior way of structuring this work.”
3. When confronted with an action item list, respond with “Critical Path Methodology (by now we’re getting good at this strategic pause business) can provide more advanced schedule performance information.”
4. “EVM-Derived Cost and Schedule Variances (pause) are preferable to gaussian-curve based risk registers” will help turn back the risk managers (no initial caps).
5. Putties can’t be reasoned with, since it’s not at all plain that they understand plain English (again, similar to several anti-PM-types I have encountered).

Now, the reason I’ve bolded the first part of the recommended responses above has to do with the Power Rangers’ emphasis on the name of their zord when invoking it, followed by a pause should they have anything additional to communicate, as they are transferring into their super hero selves. While this may be a bit dramatic in a Project Review Meeting setting, it shouldn’t be considered completely off the table if your perceived level of opposition is significant, or dressed in brightly-colored outfits clearly designed some place other than this planet.

Also, if you happen to have one of those PMP® Certification-themed pins, and might be tempted to dramatically present that in front of you as you near-shout the words in bold, well, you should probably give that a miss…

Innovation has a way of changing everything, and usually in utterly unpredictable ways, which is why I’ve described it in this blog’s title as the ultimate change agent. Want to be a true agent of change? Come up with a way of providing a service or manufacturing a product better, faster, or cheaper, and the proverbial world will beat a metaphoric path to your doorstep. But what about those instances where the change sought isn’t of recent invention or discovery, but the target organization is nevertheless deficient in that particular capability, like, oh, I don’t know, Project Management?

This is where it gets fairly complex. GTIM Nation is familiar with my respect for Thomas Kuhn’s The Structure of Scientific Revolution (University of Chicago Press, 1962), where he points out that, while people tend to look back on the progress of invention and innovation as being somewhat even, what actually tends to happen is better described as advancing in fits and starts. An example Kuhn uses is the field of cosmology, and the transition between the Ptolemy model (Sun and planets revolve around the Earth) and the Copernicus model (Earth and planets revolve around the Sun). When our ability to collect more and more accurate data leads to observations that appear to contradict (or even overturn) the commonly-held theory in a given field, addendum to the prevailing theory, named cycles and epicycles, will be produced that appear to explain the anomalies in order to keep the prevailing theory from being completely overturned. Eventually, though, enough new data accumulates to initiate a crisis leading to a “paradigm shift” (yes, Kuhn was the first person to coin this phrase). It’s at this point in the transition that things get really interesting, at least as far as parallels to management science are concerned. In the run-up to the paradigm shift, many of those holding to the conventional wisdom will aggressively resist the newer theory, and do so in ways that suggest that their objections are not purely scientific in nature. After all, to cite the late Michael Crichton[i], real science has nothing to do with consensus – if one researcher in one laboratory can show reproducible results from a valid experiment based on Theory N, and Theory N is incompatible with Theory X, then Theory X becomes discredited.

Meanwhile, Back In The Project Management World…

All of which leads back to the at-first-glance strange phenomena of a management science world that is often unwilling (unable?) to adopt well-established business model innovations, specifically in Project Management. To be fair, I hold that much of the blame for this highly uneven adoption rate lies within the PM community itself. A person can tolerate just so much eat-your-peas-style hectoring in seminar paper presentations before the threat of being tagged as not “doing PM properly” ceases to have any effect as a motivational factor. That having been admitted, I believe that the majority of the energy against the acceptance and implementation of PM techniques resides with those who have something to lose if such techniques were enacted. Of course, I’m talking about our friends the Asset Managers.

Is there a focus on Asset Management techniques in the business world now? Almost certainly. The assertion that the point of all management is to “maximize shareholder wealth” is still being widely taught at the college level, despite the influx of data challenging that little axiom’s validity. Even if such a focus could be adjusted, we would still have the legal requirements of a comprehensive accounting system, quantifying virtually every transaction in the organization, remaining. Clearly, advancements in PM capability have nothing to do with challenging, much less overturning, Generally Accepted Accounting Principles (GAAP), but it’s equally obvious (at least to us PM-Types) that a project’s Estimate at Completion (EAC) is best calculated using an Earned Value Management System. Trying to use projected average spending rates to derive it just doesn’t cut it.

When we’re talking modifications to an existing business model, we must acknowledge that those who are comfortable with the existing processes and systems stand to lose if such changes are successfully implemented, either with respect to ease of work or being seen as occupying a certain status within the current paradigm – hence massive resistance to change, even if the erstwhile change agent has discovered a superior (or even optimal) technical approach, and even if the existing problems represent a clear danger to the organization’s continued survival.

So, what’s the solution? Come up with an innovative implementation strategy. Genuine innovation is a powerful (ultimate?) change agent, especially when the commonly-employed devices of haranguing management to do better or getting them to sign some updated policy or procedure that mandates proper PM techniques have been tried, over and over, and have largely failed. There are other ways of advancing PM capability within the macro-organization.

And a real change agent/innovator will find them.

[i] “If it’s consensus, it isn’t science. If it’s science, it isn’t consensus. Period.” Crichton, Michael, Aliens Cause Global Warming, Caltech Michelin Lecture,  January 17, 2003.

Buckle up, GTIM Nation. I’m about to take you on a series of mental exercises that may very well change your perceptions about change control/change agency (ProjectManagement.com’s theme for December), a concept central to virtually all medium-to-large projects. Proper management of the change control process is often key to project success, and I intend to show it in a rather novel light.

First stop: why do we even need change control? The obvious answer is because the project in question isn’t proceeding according to plan. Of course, no project goes entirely according to plan, but we don’t convene an emergency meeting of the Baseline Change Control Board each time the PM has to take an unplanned afternoon off to see the dentist. A change has to be significant to justify initiating the Change Control process, right? The real question then becomes, how big of a change are we talking? Consider the following graph:

The dotted line represents the original cost, scope, and schedule baseline. The dashed lines show the inherent flexibility in the baseline – it’s how much scope, cost, or schedule can deviate before some adjustment to the baseline is deemed necessary. Finally, we have the solid line, showing the actual experience of the Project Team. Note how, while October is within the bracket for determining the necessity of changing the baseline, starting in November the Project rides the upper bracket until February, where it exceeds the upper limit. Within this metaphor the BCCB would need to process a Baseline Change Proposal in its March meeting. But, as fate would have it, progress snaps back to being consistent with the baseline in April, and continues within acceptable limits to Project completion. There was no way that the March BCCB could have known beforehand that this would end up being the case and, in any event, they didn’t change the baseline for whatever reasons. Now consider this graph of the same project:

Alert GTIM Nation members will readily perceive that the only changes have to do with the values of the upper and lower limits of the brackets where the Change Control function would be invoked. In other words, this plan was robust enough to handle larger fluctuations in scope, cost, and schedule when compared to the first example.

So, what about a baseline leads it to be more robust, or at least less brittle? Note that nothing in the risk managers’ (no upper case) bag of tricks set of techniques could expand the tolerance brackets in the above graphs. The risk analysis document, reduced to its core, is basically a list of things that could happen to a project that would lead to the Team laying claim to additional budget, whether that budget has been funded or not, under the rubric that such events had been predicted and somewhat quantified. Indeed, the more extensive the risk analysis, the more the original baseline should be considered intolerant of the changes that will inevitably occur during project execution. To be fair, for any project awarded on a competitive basis (the majority of them, presumably) there is going to be Marianas Trench-levels of pressure to prepare a Basis of Estimate that meets the bare minimum of the Request for Proposal’s scope requirements, since most winning bids are also the lowest ones. This being the case, even bad weather events (for construction projects, among others) can and do receive their own line item in the contingency budget estimate.

On the other side of this strange little change control phenomena is one of the deadliest project influencers, scope creep. If bad weather makes an appearance in the risk management plan (no initial caps) due to its capacity for inducing delays and overruns, how much more so would the stripped-to-its-core cost or schedule baseline be harmed by the introduction of non-aligned additional scope? I would go so far as to assert that the propensity of certain customers to request some additional capability or detail that wasn’t in any of the scope baseline documents points to an assumption that the original baseline was fairly robust in the first place, not in need of additional budget or time for “just” this one little addition (I wonder how many instances of scope creep would be eliminated if the word “just” was prohibited at project review meetings).

All of which points to a couple of observations about the whole Change Control process, specifically that the more the original cost/schedule baseline is intolerant of nominal performance deviations, the greater the need for a Baseline Change Control Board, and that these are a natural result of the competitive bid process, particularly when the lowest bid that appears to be able to meet the scope requirement(s) is all but guaranteed the win.

Interestingly, Firm Fixed Price contracts are largely immune to the anomalies of BCCBs, or the basis of the Contingency Budget, or the documents associated with risk management, but that’s a topic for another blog.