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Games, Strategies, and Managers: How Managers Can Use Game Theory to Make Better Business Decisions

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"Business is a game--the greatest game in the world if you know how to play it," said IBM's founder Thomas J. Watson. He would probably agree that business negotiations are essentially the game of predicting what the other person will do. Faced with employees, subcontractors, salespeople and others, managers are continually called upon to make strategic decisions based on "Business is a game--the greatest game in the world if you know how to play it," said IBM's founder Thomas J. Watson. He would probably agree that business negotiations are essentially the game of predicting what the other person will do. Faced with employees, subcontractors, salespeople and others, managers are continually called upon to make strategic decisions based on how someone else will act and react. How do the successful ones do it? Is it savvy? Guesswork? Even the most canny negotiators would be hard pressed to describe their own methods, which they generally develop intuitively over long and costly experience. But a key to becoming a top negotiator is now available to managers at all levels, in Games, Strategies, and Managers--the revealing new book that injects some science into the art of business decision-making. Adapted from the hottest new area of economic theory and based on the latest breakthroughs, Games, Strategies, and Managers goes far beyond the advice commonly offered to negotiators--the old saws, the tales about what worked once in Cleveland--to provide powerful insight into what's really going on beneath every negotiation. Using seven key questions as a starting point, it helps the executive strip away the distracting details of a situation. It doesn't matter if the issue is commissions, piece rates, royalties, managerial incentives, or cost-overrun provisions--the game is the same. The negotiator who recognizes these underlying rules and exploits them to best advantage will gain the upper hand, in formal negotiations as well as in dozens of everyday business situations. Of course, any game involves risk. Managers often have to make a decision without full knowledge of the consequences, and others' actions are not entirely predictable. Game theory explores how to take creative risks to get the strategic edge. Invaluable practical illustrations that show game theory in action include the setting of executives' incentives, the organizing of a network of subcontractors, and a behind-the-scenes look at how international trade negotiations really work. For the sales manager devising a commission-payment scheme to motivate salespeople, the procurement manager trying to get a subcontractor to limit production costs, the compensation committee designing a managerial incentive scheme, and beginning or experienced executives in all industries, Games, Strategies, and Managers shows how to excel at "the greatest game in the world." Even more than a powerful tool of business strategy, game theory is a valuable habit of mind--a way for executives to sharpen their thinking in business and in life. While experience may help you see the trees, game theory shows you the whole forest.


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"Business is a game--the greatest game in the world if you know how to play it," said IBM's founder Thomas J. Watson. He would probably agree that business negotiations are essentially the game of predicting what the other person will do. Faced with employees, subcontractors, salespeople and others, managers are continually called upon to make strategic decisions based on "Business is a game--the greatest game in the world if you know how to play it," said IBM's founder Thomas J. Watson. He would probably agree that business negotiations are essentially the game of predicting what the other person will do. Faced with employees, subcontractors, salespeople and others, managers are continually called upon to make strategic decisions based on how someone else will act and react. How do the successful ones do it? Is it savvy? Guesswork? Even the most canny negotiators would be hard pressed to describe their own methods, which they generally develop intuitively over long and costly experience. But a key to becoming a top negotiator is now available to managers at all levels, in Games, Strategies, and Managers--the revealing new book that injects some science into the art of business decision-making. Adapted from the hottest new area of economic theory and based on the latest breakthroughs, Games, Strategies, and Managers goes far beyond the advice commonly offered to negotiators--the old saws, the tales about what worked once in Cleveland--to provide powerful insight into what's really going on beneath every negotiation. Using seven key questions as a starting point, it helps the executive strip away the distracting details of a situation. It doesn't matter if the issue is commissions, piece rates, royalties, managerial incentives, or cost-overrun provisions--the game is the same. The negotiator who recognizes these underlying rules and exploits them to best advantage will gain the upper hand, in formal negotiations as well as in dozens of everyday business situations. Of course, any game involves risk. Managers often have to make a decision without full knowledge of the consequences, and others' actions are not entirely predictable. Game theory explores how to take creative risks to get the strategic edge. Invaluable practical illustrations that show game theory in action include the setting of executives' incentives, the organizing of a network of subcontractors, and a behind-the-scenes look at how international trade negotiations really work. For the sales manager devising a commission-payment scheme to motivate salespeople, the procurement manager trying to get a subcontractor to limit production costs, the compensation committee designing a managerial incentive scheme, and beginning or experienced executives in all industries, Games, Strategies, and Managers shows how to excel at "the greatest game in the world." Even more than a powerful tool of business strategy, game theory is a valuable habit of mind--a way for executives to sharpen their thinking in business and in life. While experience may help you see the trees, game theory shows you the whole forest.

45 review for Games, Strategies, and Managers: How Managers Can Use Game Theory to Make Better Business Decisions

  1. 5 out of 5

    Rafael Rosa

    ## Net net More interesting from a business theory history perspective than for the techniques. It has some valuable insights, but I question how applicable it is nowadays, at least on information based industries, perhaps it's 100% precise for traditional industries ## Opinion I bumped into this book by accident on the library, attracted by the word "strategy" on the title. Written in 1992 it smells like Glengarry Glen Ross, always be closing and such. He uses manufacturing examples and a lot of r ## Net net More interesting from a business theory history perspective than for the techniques. It has some valuable insights, but I question how applicable it is nowadays, at least on information based industries, perhaps it's 100% precise for traditional industries ## Opinion I bumped into this book by accident on the library, attracted by the word "strategy" on the title. Written in 1992 it smells like Glengarry Glen Ross, always be closing and such. He uses manufacturing examples and a lot of references to the might of the Japanese industry, which is kind of funny in retrospective, but he does have some good points. The things I think don't fit that well: * Probably due to the time it was written there's no concern about system improvement, instead it focus on localized incentives and optimization * The book assumes it's never on the players best interest to share info, cooperation is based on the "old boys" network * All examples fit better commodities and physical goods, I'm not sure services would fit so well * The author acknowledge that focusing only on money incentives might generate "perverse" side effects (lower quality, gaming the system metrics, etc), but he just gloss over the subject The best recommendation from the book can be lifted straight from it's last chapter, where he lists questions that you should ask yourself when considering a market strategy: * Who are the players? * What options are open to the players? * Understanding their sources of bargaining power is key * What goals are the players pursuing? * What are the sources of gains from trade? * Can any of the players effectively make commitments? * What is the time structure of the game? * What is the information structure of the game? ## Chapter Notes (I wish Goodreads supported GitHub's markdown) * Playing games as games * Use standard game theory formulas as methaphors to analyse business transactions * The prisioners' dilemma * Two thieves are caught and are interrogated in separate rooms. Both are offered the same deal: * If both confess they will serve 8 years each * If one confess while the other keeps quiet, he will go free and the other will server 15 years * Both can have serve a 1 year sentence if none of them confess * They are isolated and cannot agree on a common plan * There isn't a single optimal response * People who fail to cooperate for their own mutual benefit are not necessarily foolish or irrational, they may be acting perfectly rationally Des (horizontal) | Confess | Don't Confess Al (vertical) | | Confess | (-8, -8) | (0, -15) Don't Confes | (-15, 0) | (-1, -1) * The rational pigs * Two pigs in a lab, one dominant and one subordinate * They are in a big cage with buttons on opposite sides, one pig on each side * Each time the button is pressed it's released a 6 unit food portion on the opposite side * Sub pig can run faster * Running from one side to the other costs 0.5 units in energy * If only sub presses, dom pig eats 6 all units * If only dom presses, sub pig eats 5 of 6 units before dom arrives * If both press, sub pig gets 2 units before dom arrives * Optimal response depends on the action of the other pig * For the sub, pressing is always the best option, first line, numbers on the left == 1.5 or 5) * For the dom it depends on what it expects the sub to do. * If it assumes the sub is rational, it can count on it pressing the button, so he should NOT press the button (2nd column, number on the right == 6) * If it assumes the sub isn't rational and won't press the button, it should press it (1st column, number on the right == 3.5) * None pressing the button is the worst outcome for both Dom (horizontal) | Press | Don't Press Sub (vertical) | | Press | (1.5, 3.5) | (-0.5, 6) Don't Press | (5 , 0.5) | (0, 0) * The location game * Two beer vendors, B and W, work on the beach * Both are required to sell at the same price * They can choose where they want to locate themselves * Customers are spread evenly across the beach * They purchase from the closest vendor * Where will they locate themselves? * Optimal solution: located side by side in the middle of the beach * If starting situation is: -----B-----*-----W----- * It will evolve to: ----------B*W---------- * Nash equilibrium: all players are doing the best they can given the other players actions, everybody being rational players * Negotiating with a deadline * Mortimer and Hotspur, copy from the web * Last player has more bargaining power * Example: waiting to bid on the last minute of a auction to for the seller go sell it or loose it * Understanding conflicts and cooperation * Sources of gains from trade * Differences in preferences - buyer values object more than seller * Comparative advantage - seller can product object cheaper than buyer. Economies of scale * Differences in beliefs - seller and buyer have different opinions on the value of object. Information asymmetry * Efficiency on trade doesn't necessarily means win-win * Zero-sum games == pure conflict, players actions only affect the distribution of the pie, not its size * Few games are zero sum * Retaliation and fear of retaliation change the dynamics of a game * Weighing Risks * Method to calculate risks * List all possible eventualities * Attribute probabilities to each * Calculate the expect return of each (expected return = value * % probability) * Calculate the risk premium, how much would you pay to get rid of the risk? * If risk averse, subtract the risk premium from the expected return, that's your risk adjusted expected return (payoff) * Choose the decision that yields the highest risk adjusted expected return * Companies are usually less risk averse than individuals, since specific transactions usually have a low impact on the overall operation * Gaining bargaining power * In fully transparent transactions there's no bargaining * In normal real world situations most transactions don't have a single efficient outcome * Bargaining is deciding which outcome will happen * Each players beliefs and knowledge define how strong is each party bargaining power * Sources of bargaining power * Knowing the other player reserve price is a source of bargaining power * Having alternative players/your opponents has competition is a source of bargaining power * If your opponents has options but they are worse than you, you have more bargaining power * Time is money, those who can wait the longest have more bargaining power * Focal point * Find a method to measure you own and your opponents concessions, even if the measure doesn't really capture the objective value * Commitment as a strategy * It's good to have flexibility before negotiations begin, but be inflexible during negotiations * The commitment must be believable to work * Contracting * If principal and agent interests align there's no conflict * Incentives are a way to shift the alignment between conflicting interest towards a common goal * Incentives can come in many forms such as peer pressure, pride in craftsmanship, work ethic, monetary compensation and others * The book focus on money as a more measurable incentive mechanism * Designing contracts * When the agent has an incentive not to be transparent, create rules that will increase their payoff by sharing the info * When the agent is more risk averse than the principal, it pays off for the principal to shoulder some of the risk to increase incentives * "Incentive problems are essentially informational problems. With perfect information about the agent's actions, the principal could easily design a contract to elicit the desired actions"

  2. 5 out of 5

    Aaron

  3. 4 out of 5

    Filipe Sinclair

  4. 4 out of 5

    Jo de Hastings

  5. 5 out of 5

    John

  6. 4 out of 5

    Orniii

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    Ravi Chaudhary

  8. 5 out of 5

    Clement Miller

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    Caleb Carpenter

  10. 4 out of 5

    Seppe van ‘t Westende

  11. 5 out of 5

    Naftali Feddes

  12. 5 out of 5

    Juan Manuel Santa Maria (PMA S.A.)

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    Axel

  14. 4 out of 5

    Rocketshipdog

  15. 5 out of 5

    Alaina

  16. 5 out of 5

    Timothy B. Corcoran

  17. 4 out of 5

    Josh McDevitt-Spall

  18. 5 out of 5

    Hugo Cordova

  19. 5 out of 5

    Vish Parikh

  20. 4 out of 5

    Adam Luciano

  21. 4 out of 5

    Steve Cox

  22. 4 out of 5

    Jerry

  23. 5 out of 5

    Theresa

  24. 4 out of 5

    Stan

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    Richard

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    kara

  27. 4 out of 5

    Mark

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    Paola

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    Roper

  30. 5 out of 5

    Randall Ronsberg

  31. 5 out of 5

    Ahmed

  32. 5 out of 5

    Kyle

  33. 4 out of 5

    Imperfect

  34. 5 out of 5

    Agone Aldecoa

  35. 4 out of 5

    Devon

  36. 5 out of 5

    Themegalomaniac

  37. 5 out of 5

    Neritan

  38. 4 out of 5

    Bert

  39. 5 out of 5

    Malcolm Ferguson

  40. 4 out of 5

    Luke

  41. 4 out of 5

    Saul

  42. 5 out of 5

    Gustavo Degasperi

  43. 5 out of 5

    Leandra Nunes

  44. 4 out of 5

    Doug Lautzenheiser

  45. 4 out of 5

    Kew

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