Tuesday, May 30, 2006

Game Theory

Chandler Howell [Got Game (Theory)?] has just come across an attack on the real-life use of game theory in business by Martin Kihn [You Got Game Theory!], published in Fast Company, February 2005.

Kihn can't find suitable references to game theory in the business literature, or in the heads of academic experts. Because game theory can't be found in business theory, he concludes that it cannot be found in business.

Howell retorts that he uses game theory every day - he just doesn't publish an academic paper every time he does so.

I think both are right. I agree that the lack of concrete examples of game theory is an interesting observation - and if I made my living from pontificating on game theory, I might be a little worried.

But if you are going to do a proper scientific experiment, you have to have a proper control. [See Richard Feynmann's article on Cargo Cult Science.] The absence of game theory in the business literature doesn't mean very much until we have something to compare this finding against. So let us ask how many references are there in the academic business literature to set theory, to algebra, to elementary arithmetic? If we cannot find specific references to these important branches of mathematics, does this mean that business people don't use them?

What parts of mathematics or economic theory (if any) are regularly referenced by business people?

There are lots of examples of game theory in movies. Can we use fictional examples when we are discussing business? Bill Waddell thinks this is unfair, and is scornful of Howard Schwartz who uses some material from the film Silkwood (starring Meryl Streep) to illustrate some aspects of organizational dysfunction in his book Narcissistic Process and Corporate Decay : The Theory of the Organizational Ideal. But Freud used examples from Greek myth, and Einstein explained some of his theories in terms of imaginary (and impossible) experiments. Fiction is okay for explanation in science, as long as you don't imagine it proves anything.

[Update: In a later post, GM NASA and Sigmund Freud, Bill Waddell admits that Schwartz has some good insights about real companies as well.]

Mathematics and economics come into business studies in the obvious way - though counting and calculating money, and complicated functions relating to money. But they also come into business studies to help us understand structural things like conflicts of interest and patterns of behaviour. Just don't expect managers to stop in the middle of running a business and give you a guided tour of the mathematics involved.

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