Game Theory in Management

In his best-selling book The Black Swan; The Impact of the Highly Improbable (Random House, 2007) Nassim Taleb likens what investment brokers, commodities traders, and stock exchange analysts do to snatching nickels from the path of oncoming steam rollers. If I could be so presumptuous as to paraphrase Taleb, another way of putting that would be to say that those who make a living managing portfolios do so while adopting tenets of management theory that are not only flawed, they actually lead to a perspective that prevents the ready identification of profound economic hazards.

In one of my previous blogs, I made reference to a few of these management ideas:

·         The point of all management is to maximize shareholder wealth.

·         Risk Management techniques are applicable to all potential project events, both positive and negative.

·         Quantitative Analysts, or “quants,” on whom the seeming whole of Wall Street investors depend, can consistently generate usable causal analysis of market trends based on observations of thousands of data points pertaining to the various markets.

The first bulleted assumption, which has been pushed by business schools all over academia as irrefutable for decades, is one of the easiest to overturn. Consider what happens during a hostile takeover, as an example. Typically, when a hostile takeover begins, the target company’s stocks jump in value, often significantly. Therefore, if the point of all management was to maximize shareholder wealth, then, in a hostile takeover, no acquiring company would ever follow through on the attempt, and no target company would ever resist. And yet, over and over you see potential target organizations not only failing to sit back and happily watch their company’s equity go up, they will actually engage in tactics that negatively impact their profit and loss statements (like taking a “poison pill”) to avoid the takeover. Clearly, the “maximize shareholder wealth” meme has its limits, but those consultants, accountants, and professors whose paychecks depend on the acceptance of that assertion will never admit as such. And, as such, the theories they propagate that have as a component the maximize shareholder wealth assertion will ultimately prove flawed.

Take also the Risk Management crowd’s basic analysis techniques, the Decision-Tree Analysis and the Monte Carlo simulation. Each requires large amounts of speculation from control account managers, along the lines of identifying potential project-impacting events, their potential impact, and the odds of their occurrence. Once these numbers are collected, the Risk Management aficionados simply love crunching those numbers in various formulas (which, invariably at some point pull in a Gaussian curve) and pretend to deliver some quantification of how the project’s future will unfold. This fails for two very simple reasons:

·         The data used to feed these analyses is pure speculation, and

·         The future cannot be quantified.

As for the quants, they may have been absent from statistics class the day their professors made clear that correlation is NOT causation (generally stated at the beginning of the first day of class). Instead, they pore over massive amounts of data associated with their areas of investment, seeking to place causal links between predecessor events and successor changes in wealth creation or destruction. Then, when they believe they have discovered a certain causal loop, they will make recommendations one way or the other when the presumed causal predecessor events manifest again. I’m not saying they're stupid – far from it. I’m going, however, to paraphrase Ronald Reagan, and say that they just know lots of things that just ain’t so.

With management “science” notions such as these (among many) influencing the current academic debate (not to mention the myriad software platforms) on what constitutes portfolio management, it’s no wonder they entire area of discussion is completely, well, screwed up. Want to know how to navigate your way to a legitimate portfolio management system? Either order my recently-released, must-have book Game Theory in Management (Gower Publishing, 2012), or stay tuned to this blog. The former will give you your answers immediately, the latter will take a bit more time.

I was thrilled when Cameron sent us Projectmanagement.com writers the theme for October, since it so closely aligned with the extensive research I conducted when writing my recently-released, must-have book, Game Theory in Management (https://www.ashgate.com/default.aspx?page=641&calctitle=1&pageSubject=2064&pagecount=0&title_id=11616&edition_id=11979). Have you ever noticed how often management writers offer up novel or different definitions of the term "portfolio management?" I have, and I believe when writers employ this tactic (known as “showing your machinery”) it is a dead give-away that that particular term has never been adequately defined. Think about it: when the (lucky dog) writers for Sports Illustrated write the first paragraphs of their articles, do they ever take the time to define, say, what a football is?

Think about how many different definitions of “portfolio management” are out there. They all point toward some high-level, all-encompassing function that simultaneously “recognizes” the individual elements comprising the portfolio, while having a clear vision of the so-called big picture. Which is it? And, before you say “It’s both!”, ask yourself: if “portfolio management” is nothing more than some conflation of the micro and macro aspects of project/program management, why are those software packages that pretend to deliver “portfolio management” really little more than project management packages with a few asset management techniques thrown in? (For more on this, see my last blog.)

As I have blogged before, Isaac Asimov’s iconic Foundation trilogy introduced the concept of Psychohistory, discovered by the character Harry Seldon. Psychohistory is a structure that allows the future to be predicted via calculation. Obviously, such a structure has profound implications, most readily grasped by the politicians and captains of industry in Asimov’s projected future. Seldon and a group of scientists are sequestered away to a secret location to safeguard both the insights of Psychohistory and the existing (future) technology, since the galaxy has been calculated to be on the verge of a civilizational collapse. Seldon seeks to shorten the intervening “dark ages” by millennia.

While Asimov provides scant mathematical or theoretical insights into exactly how Psychohistory works, this reader came to the conclusion that it was some combination of game theory, risk management theory, and network theory. Interestingly enough, in the novels the whole scheme is nearly undone by the introduction of the character known as The Mule. The Mule has psychokinetic powers of persuasion, and nearly undoes the entire calculated recovery timeline. Being a mutant, his influence could not have been calculated or accommodated within the Psychohistory structure.

Like Psychohistory, the portfolio management branch of management science theory makes appeals to the capacity to evaluate situations and circumstances that are too complex to reduce mathematically, much less calculate optimal alternatives. Okay, it’s time for a little uncharacteristic (?!) Hatfield bluntness here. The products on the market today that claim to be capable of performing portfolio management are hopelessly inadequate to the task. So, too, is the body of literature that claims to address it (with the exception, of course, of my previously-mentioned, must-have book!). There are simply too many parameters to take into account. Adding to the mythology are several management science tenets that are accepted as absolutely true, but are, in fact, utterly invalid. As long as these tenets cling to portfolio management software and theory like Great Lake lampreys, neither should be taken seriously. Some of the most notable of these tenets include:

·         The point of all management is to maximize shareholder wealth.

·         Risk Management techniques apply to all potential project events, both positive and negative.

·         Quantitative Analysts, or “quants,” on whom the seeming whole of Wall Street investors depend, can consistently generate usable causal analysis of market trends based on observations of thousands of data points pertaining to the various markets.

Okay, let me go ahead and pull the pin on my rhetorical grenade and roll it out on top of the board room table. Each of the assertions in the previous three bullets is demonstrably false. Want to know the truth about them?

Well, to tempt a reputation as a tease, there are two ways for my readers to become informed about this particular topic: either keep reading this blog, or buy my previously-mentioned recently-released, must-have book. The more clever among my readers, who want more on this topic, can post challenging comments and provoke a response -- theoretically.

Back when I was working for Advanced Sciences, Inc., the company sent its upper management to a retreat in North Carolina to take a week-long class in Project Management. Since the attendees came from four different offices scattered around the United States, there were some mild dialect differences that led to a couple of entertaining interactions. But there was one phrase that seemed to be employed a lot, without a consensus on its meaning. That phrase: “slam dunk.”

To around half the attendees – those who, no doubt, either played basketball or at least kept up with a favorite team – the meaning was clear: a can’t-miss shot, something rather automatic. The other half seemed to think the term meant something analogous to getting slammed, or, put another way, to encounter excessive resistance, often from an internal source, for executing a certain approach to resolving a problem. Now, I was aware that the phrase meant very different things to different people, but I believe very few of the other attendees were so aware. Some of the outcomes were hilarious.

Manager with definition A: “So, if we can get our schedule baselines in good shape, then any government audit of them would be a slam dunk.”

Manager with definition B: “So, we don’t want that!”

Manager with definition A: “Don’t want what?”

Manager with definition B: “A government audit.”

Manager with definition A: “But I just got done saying it was something of a sure thing.”

Manager with definition B: “Like death or taxes.”

Manager with definition A: “What’s like death or taxes?”

Manager with definition B: “The government audit.”

Manager with definition A: “Of our baseline?”

Manager with definition B: “Yeah, I was agreeing with you.”

Manager with definition A: “Oh. Okay.”

Something similar happened when I was sent on a train-the-trainer class of a certain scheduling software platform that was attempting an expansion into portfolio management, which just happens to be this month’s Gantthead theme.  This expansion involved including in the scheduling software’s capabilities things like timesheet routing and approval, travel expense routing and approval, miscellaneous expense routing and approval – in other words, things that traditionally fell within the realm of the General Ledger, and Asset Management. At the end of the course, I and my colleagues were revealed to the president of this software company (his name may be recognizable to some of my readers, which would lead to an easy ID of the software I’m talking about, so I can’t be specific here. Sorry.) to be, not subcontract training company employees, but one of this software company’s larger customers. An audience with the president and his top veeps was hastily arranged, and our opinions of the new capabilities invited.

“You are established as a platform for project management information” I began. “If you wanted to expand your capability, you should have sought to perform more diverse PM functions, like Earned Value reporting formats, or creating the Basis of Estimate. Instead, you have expanded into areas usually covered by an organization’s General Ledger. So, if some company were to use your new portfolio management capabilities, would these supplant their existing systems? Or augment them? Was there any thought about how this new portfolio management system would interact with the General Ledger?”

I could almost see the light bulbs going off in the heads of the veeps, who were seated to either side and slightly behind the president. At least I was resonating with somebody.

“We’re confident that these new features will enhance our software’s ability to provide portfolio management capabilities…” the president began, as what he was saying began to strongly resemble the muffled trumpet used as a stand-in for whenever an adult communicates with Charlie Brown or one of his friends in the Peanuts specials. It seemed to me that an awful lot of effort went into this software’s upgrade without everyone involved being clear on the exact definition of “portfolio management.” It was almost as if this organization’s leaders were targeting information streams involved in executive management decision support, and coding them in to the existing system as adjuncts without really evaluating the valid components of portfolio management.

In my subsequent posts this month, I will explore the proper role of both the portfolio management function, and its appropriate supporting information streams, as well as those systems that pretend to provide the portfolio management function, but fall laughably short, and why. Yeah, yeah, I know – there are a lot of definitions of “portfolio management” out there, and many of them sound quite reasonable. They are, however, either wrong, or, at best, incomplete. I actually have the complete answer, and it’s shown in my recently-released must-have book, Game Theory in Management (http://www.ashgate.com/default.aspx?page=641&calctitle=1&pageSubject=2064&title_id=11616&edition_id=11979). Given the number of organizations hawking portfolio management capabilities, and the frequency with which they get it wrong, it should prove to be an interesting October.

As my last contribution to the Cutting Edge meme for Gantthead in September, I want to examine how one particular really dopey idea has made inroads into the Management Sciences, became popular, and then kind of stuck around, despite being, well, dopey.

My target is the business fable genre in literature. Wikipedia lists the following as New York Times bestsellers in this arena:

• Who Moved My Cheese by Spencer Johnson
• The One Minute Manager by Ken Blanchard
• The Five Dysfunctions of a Team by Patrick Lencioni
• The Treaveler's Gift by Andy Andrews
• Surviving Your Serengeti by Stefan Swanepoel

The point of the business fable is to assert some management science theory through fictional characters in environs both real and fictional, and – wouldn’t you just know it? – the management science theory being “tested” ends up working wonders. I believe this writing approach to be disingenuous, and in Cecil B. DeMille proportions.

Probably the most famous version of this in the Project Management realm is Eliyahu Goldratt’s Critical Chain (North River Press, 1977). In this novel the management “science” theory being propagated is essentially that resources can be transferred from non-critical path activities onto the critical path, thereby shortening the overall schedule network’s total duration. There are several problems with this idea, besides the most obvious one of what happens if the workers already assigned to the activities on the critical path are employing any specialized talents at all. A temporary excess of concrete pourers won’t, in all probability, be able to help any other team on the job site. The next biggest problem with Critical Chain is that it’s hardly original. Adding resources to a schedule network, particularly the activities on the critical path, is a trick that’s been around since the beginning of CPM scheduling. It’s called “crashing the schedule,” and every professional scheduler in the world knows it. But not the characters in Critical Chain! No, the protagonist just kind of swerves into it, and tries it out. Success and happiness follow in abundance, which it is what tends to happen in a fictional universe where a management idea is being sold.

I was actually asked by a very famous project management organization, that had its own publishing arm, to review a manuscript they were considering publishing. What I received was the management science version of Santa Clause Conquers the Martians (1964 film that is regularly included in lists of the worst movies ever produced). The manuscript followed the business fable template, but with well-known characters: Santa Clause and his elves! I swear I am not making this up. As Christmas Eve loomed, the elves were faced with production problems, supply problems, organizational behavior and performance problems … the list went on and on. Santa himself, in the role of toy production CEO, was trying his jolly best to resolve these issues, but was having little success until he began receiving anonymous notes bearing extremely cryptic bits of advice. Now, I know how dear manuscripts are to their authors, and I didn’t want to be so churlish as to let on that I thought the work was laughably bad. So, my evaluation was couched in terms like “I’m not completely confident characters that are so well-known in modern popular culture provide the most advantageous vehicle for furthering management theories of this kind.” What I wanted to say was, “Are you freakin’ kidding me? Bwa ha ha ha ha ha…”

In ancient Greece, the cradle of modern drama, there was a literary device known as Deux Ex Machina, literally, god from a machine. This device worked like this: the central conflict of the play would be introduced, and would drive the rising action towards the play’s climax. Then, when all seemed lost, one of the Greek gods would appear, “flown” in suspended from a crane. This god would use his powers to set all of the conflicts and participants aright, and the play would end. Even in ancient times, this was viewed as an extremely cheesy device, and ipso facto evidence of poor writing.

The business fable device is simply Deux Ex Machina, dressed up for a management profession crowd. The characters are introduced, the central conflict is recognized, the rising action begins. Then, when all seems lost, the management science theory is plugged in, and, voila!, everything is set aright. To get a sense of the utter absurdity of this device in the furthering of management theories, think of the reaction to a theory of surgical practice that was advanced, not through clinical trials, but through a New York Times best-seller – in fiction!  The very act of choosing that venue would render the author a laughingstock, if they were serious about advancing that particular surgical technique. But not so in “cutting edge” management. Small wonder the practitioners of the hard sciences tend to roll their eyes at the very mention of “management science.”

Back on the stage, actors react as if they have been stabbed when the prop in use is a rubber knife. But, off the stage – that is, in a non-fictional setting – rubber knives are literally (get it?) useless, “cutting edge” and all. Remember that the next time you see a business fable title on the New York Times best-seller list.

In my previous blog I examined how Game Theory failed to correctly identify the most likely strategy adopted by participants in The Ultimatum Game. I received a couple of comments on that piece, which actually serve as a segue into where I wanted to go this week. Any discussion of what the cutting edge of management science is, how it was developed, where it can be found, or when the next leap ahead might be expected or, if it’s already out there, recognized, largely depends on one crucial element: the who (not the rock band).

Who is it that developed the new, cutting edge idea? As I discussed in my September 3 blog, Thomas Kuhn points out in The Structure of Scientific Revolutions (University of Chicago Press, 1962) that when new theories are published and advanced that overturn an existing structure, those doing the publishing and advancing are almost always widely criticized, sometimes brutally so. No matter how effectively the new theory appears to explain the data points that appear to be only marginally explainable via the existing structure, those expounding the cutting edge hypotheses and theories can expect to be either widely ignored or wildly attacked, at least in the idea’s early stages of introduction. This phenomena is somewhat more pronounced in the so-called management sciences, since very little of the situation-stimulus-reaction-result chain that occurs in the macro\economic environment can be recreated in an experimental setting, where all of the factors and parameters are accounted for.

Take Tom Peters. In his works, he draws heavily from organizations that have realized some measure of success. His visits and interactions with the people from those organizations, when combined with his assessment of what’s different and what’s good about this particular organization, provide the majority of the narrative he provides in his books. However, as Nassim Taleb asserts in The Black Swan, it is an idea’s contagion, and not its validity, that drives its acceptance. We tend to take Professor Peters at his word, and try to search for some insight, some kernel of transplantable truth that we can take away from the stories of the sausage factory or gas station, or wherever else, and insert it into our organizations. We have no way of knowing what cognitive biases are in play when he assembles his narrative, nor do we even know if the examples he uses have realized long-term success as a direct result of the things he has identified as unique and good. Alas, such transplants are difficult and rare. It’s my opinion that Dr. Peters’ ideas are simply too broad and inchoate to lend themselves to specific implementations, lacking, as they do, an overarching structure that can be used to evaluate their fitness and meet.

Back home, within our organizations, it’s rather common for cutting edge ideas to be met with dismissal or derision. Problem is, bad ideas are also often met with dismissal or derision. On occasion, when a given employee has collected a critical mass of ideas that have been rejected by the owning organization, she will set out on her own and create a business based on the rejected model, to see if it really does work the way it was envisioned. This represents one of the truest laboratories for cutting-edge management science ideas, with the results written in terms of success or failure, for all to see.

For managers employed in areas where significant barriers to entry exist, this is usually not an option. These are pinned down in an environment of competing narratives, where attempts are made to attribute successes to various individuals’ contributions, and failures are laid at internal competitors’ feet (or hung around their necks – figuratively, of course). Politics – as I define as those actions taken that further an individual’s (or sub-group’s [clique’s]) agenda, but do not add (or even detract) from the macro-organization’s agenda – serve as a sort of watchdog that attacks those carrying the cutting-edge idea forward. Overcoming this bow-wave of resistance is the focus of the Implementation/Integration crowd’s body of work, and it is no small task.

Essentially, if you want to know what the cutting edge of management science is, then seek to find two essential ingredients:

1.      Who is trying to change the industry, or the organization?

2.      Assuming they are being frustrated in their attempts to implement change, why are they being frustrated? Is it because the change they seek is not beneficial or practical, or is it something else?

New and paradigm-shifting ideas are all around us, and not just in the management blogs and new, must-have books on the subject (like Game Theory in Management  http://www.gowerpublishing.com/isbn/9781409442417). We all work in mini-management science laboratories, with cutting edge ideas often just under our noses. The challenge to those seeking these cutting-edge ideas is to put aside our cognitive biases and political considerations, and recognize them.