Games, scenarios and chaos

What they mean for strategic planning

What is game theory?

• Mathematics of decision-making

• It is not a game – but a serious study

• Way of predicting outcomes when decision-making by one party affects the decisions of others

The theory

• First example: do unto others as you would have them do unto you

• Sun Tzu

• John von Neumann and Oskar Morgenstern Theory of Games and Economic Behaviour 1944

• John Nash

• Adam Tversky and Daniel Kahneman

What’s it based on?

• Rational theory of economics – people seek to maximise their utility, happiness and self-interest

• However, behavioural economics provides new perspectives – people don’t always act rationally eg risk aversion, loss minimisation

Why use it?

If you can predict what people might do it’s useful for:

• Strategic decision-making

• Analysing markets and opportunities

• Negotiation

• Assessing the viability of projects, products etc etc

The Prisoners’ Dilemma

Two suspects are arrested. Not enough evidence but both put in separate cells unable to contact each other and know what the other is, or might, do. Police visit both and offer a deal – if one testifies against the other and the other stays silent the betrayer gets off free and the silent gets 10 years. If both stay silent they get a minor charge and six months jail each. If each betrays the other each gets two years.

The dilemma – what’s the best strategy?

The answer

• The best choice….. both stay silentHowever – note this is a zero

sum game and the real art in game theory is when it’s not a zero sum game.

Scenario planning

Scenario planning could be called complex game theory – a system of asking what ifs?

Shell describes scenario planning as providing alternative views of the future, identifying significant events, main actors and their motivations so they can help us explore what the future might look like

The Shell resource

• “Scenarios are stories about the future,but their purpose is to make better decisions in the future.”

• Check out

www.shell.com/scenarios

The Shell approach

• Preparation: clarifying goals and resources• Pioneering: broadening perspectives and

challenging assumptions• Map-making: Creating vivid and coherent

stories about the future• Navigating: Successfully finding your way

as events unfold• Reconnaissance: Scanning the

environment for developments

Some keys

• Challenging your own frame of reference

• Thinking about the uncertain aspects of the future

• Stimulating debate

• Addressing challenges

• Preparing for surprises – possibles not probables

• Challenging the conventional wisdom

Some starting points

• Asking what ifs in a disciplined way• Using standard techniques eg PEST (Political,

economic, social and technological)• Studying history• Environmental scanning• Healthy scepticism about group think• Risk and opportunity analysis

But be careful of chaos

• Chaos theory seeks to describe complex, non-linear situations where you can’t predict the future from the past.

• The best example Edward Lorenz “the butterfly effect” in which small effects can have large consequences

• The paradox of chaos is that there may be no equilibrium but patterns may emerge

Where is it used?

• Stock markets and financial engineering

• Scenario planning and unpredictable events

• In companies where there is complexity and non-linear effects

• Wherever humans are involved (eg Fosters and VB)

Some conclusions

• Understanding theory can provide practical pay offs

• Game theory is a good way of looking at what people do and why

• Scenario planning is the ultimate game theory exercise asking what ifs about the big questions about the future

• But beware chaotic effects!