The ongoing discussion of Game Theory based on the book Co-opetition.

Simplicity is a virtue – sometimes. Other times you need to make things complicated, even unpredictable. You need to create a fog. A simple game quickly becomes transparent and you may not always want people to see through what you are doing.

In poker, you are unlikely to win a big pot if you bet only when you have a strong hand. That’s because, after a while, the other players will see through what you are doing. There will be no fog. They’ll realize that whenever you raise, it’s because you have a strong hand, and so they will fold. That gives you the opportunity to bluff and win more small pots. You can raise with a weak hand and trick the other players into folding better hands. But you don’t want to get caught bluffing – or do you? Professor Tom Schelling, a leading game theorist, has pointed out (what every poker pro knows) that there can be bigger gain from bluffing and getting caught. Now you’ve really stirred up the fog.

You can change the game by changing people’s perceptions. This is the domain of tactics. In some sense, everything is a tactic. Everything you do, and everything you don’t do, sends a signal. These signals shape the perception of the game. And what people collectively perceive to be the game is the game. You need to take account of perceptions to really know what game you’re in and to be in control of how you change it.

Rationality and Irrationality

People often imagine that game theory requires all players to be rational. Everyone is out to maximize profits. Everyone understands the game. There are no misperceptions. Feelings of pride, fairness, jealousy, spite, vengefulness, altruism and charity never arise. Which is all very nice, but it’s not the way the world is. So much for game theory.

Early game theorists had good reason to spend little time worrying about irrationality. Game theory started out by analyzing zero – sum games, like poker and chess. In these games, failing to anticipate that the other player may make an irrational move doesn’t get you into trouble. If he does something irrational, that’s good news for you. Anything that makes him worse off must make you better off, since it’s zero – sum game.

But games in business are seldom zero – sum. That means you can succeed together or fail together. When another player can take you down with him, you care about his rationality.

It’s easy to get confused about just what “rationality” means. Here’s what it means to me – a person is rational if he does the best he can, given how he perceives the game (including his perceptions of perceptions) and how he evaluates the various possible outcomes of the game.

Two people can both be rational and yet perceive the game quite differently. One person may have better information than the other. But if the second doesn’t know what the first knows, he’s not being irrational in seeing things differently. The difference in information naturally leads to a difference in perceptions. People can guess wrong and still be rational. They are doing the best they can given what they know. Like wise two people can both be rational and yet evaluate the same outcome quite differently.

The Millenium Challenge

Author Malcolm Gladwell, in his book “Blink” gives an example of the military’s attempts to lift the fog of war, rational/irrational perceptions and changing the rules. The group that runs war games for the U.S. military is called the Joint Forces Command, or as it is better known JFCOM. The Millenium Challenge 2002 was the largest and most expensive war game thus far in history.

” The scenario, a rogue military commander had broken away from his government, somewhere in the Persian Gulf and was threatening to engulf the entire region in war. The role of the rogue commander of this ‘Red Team’ was to be played by Paul Van Riper, a retired Viet Nam War Marine Commander described as strict and fair and a student of war, with clear ideas of how armies ought to conduct themselves in combat. One of his soldiers said ‘He was a gunslinger, somebody who doesn’t sit behind a desk but leads the troops from the front… Wherever the skipper operated, the enemy was put off by his tactics…”

“With Millenium Challenge, then, Blue Team was given greater intellectual resources than perhaps any army in history. JFCOM devised something called Operational Net Assessment, which was a formal decision-making tool… They were given an unprecedented amount of information and intelligence from every corner of the US Government and a methodology that was logical and systematic and rational and rigorous. They had every toy in the Pentagon’s arsenal.

The Millenium Challenge, in other words, was not just a battle between two armies. It was a battle between two perfectly opposed military philosophies. Blue Team had their databases and matrixes and methodologies for systematically understanding the intentions and capabilities of the enemy. Red Team was commanded by a battle hardened veteran who didn’t believe you could lift the fog of war. He was convinced that war was inherently unpredictable and messy and nonlinear.

On the opening day of the war game, Blue Team poured tens of thousands of troops into the Persian Gulf. They parked an aircraft carrier battle group just offshore of Red Team’s home country. There, with the full weight of its military power in evidence, Blue Team issued an eight point ultimatum to Van Riper, the eighth point being the demand to surrender. They acted with utter confidence, because their Operational Net Assessment matrixes told them where Red Team’s vulnerabilities were, what the Red Team’s next move was likely to be and what Red Team’s range of options were. But Van Riper did not behave as the computers predicted.

Blue Team knocked out his microwave towers and cut his fiberoptics lines on the assumption that Red Team would now have to use satellite communications and cell phones and they could monitor communications.

‘They said that Red Team would be surprised by that,’ Van Riper recalled. ‘Surprised ? Any moderately informed person would know not to count on those technologies. That’s a Blue Team mindset. Who would use cell phones and satellites after what happened to Osam bin Laden in Afghanistan ? We communicated with couriers on motorcycles and messages hidden inside prayers.’

Suddenly the enemy that the Blue Team thought could be read like an open book was a bit more mysterious. What was the Red Team doing ? Van Riper was supposed to be cowed and overwhelmed in the face of the larger foe… On the second day of the war, he put a fleet of small boats in the Persian gulf to track the ships of the invading Blue Team navy. Then, without warning he bombarded them in an hour long assault with a fusillade of cruise missiles. When Red Team’s surprise attack was over, sixteen Blue Team ships lay at the bottom of the Persian Gulf.”

A valuable lesson for JFCOM ? Think again:

“For a day and a half after Red Team’s surprise attack on Blue Team in the Persian Gulf, an uncomfortable silence fell over the JFCOM facility. Then the JFCOM staff stepped in. They turned back the clock. Blue Teams sixteen lost ships, which were lying at the bottom of the Persian Gulf, were re-floated. In the first wave of his attack, Van Riper had fired twelve theater ballistic missiles at various ports in the gulf region where Blue Team troops were landing. Now JFCOM told him all twelve of those missiles had been shot down, miraculously and mysteriously, with a new kind of missile defense. Van Riper had assassinated the leaders of the pro-US countries in the region. Now he was told those assassinations had no effect.”

“‘The day after the attack, I walked into the command room and saw the gentleman who was my number two giving my team completely different set of instructions,’ Van Riper said. ‘It was things like – shut off the radar so Blue force are not interferred with. Move ground forces so marines can land without any interference. I asked, ‘Can I shoot down any V-22 ? and he said, No, you can’t shoot down any V-22s. I said ‘What the hell’s going on in here?’ He said, ‘Sir, I’ve been given guidance by the program director to give completely different directions.’ The secound round was all scripted, and if they didn’t get what they liked, they would just run it again.”

Blink by Malcolm Gladwell

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Simply dismissing someone as irrational closes the mind. It is much better to work harder at seeing the world as the other person sees it. This is a mind expanding exercise. Trying to understand what motivates the other person, what drives him, can help you anticipate what he’s going to do in the future or how he’s going to respond to something you do.

In summary: the fact that other people view the world differently does not make them irrational. In fact, if you try to impose your rationality on others, who is really being irrational ?

The issue of whether people are rational or irrational is largely beside the point. More important is remembering to look at a game from multiple perspectives – your own and that of every other player. This simple sounding idea is possibly the most profound insight of game theory.

When I am getting ready to reason with a man, I spend one third of my time thinking about myself and what I am going to say, and two thirds thinking about him and what he is going to say.                                   Abraham Lincoln

 

 

Next – The Scope and Links between Games

and the conclusion of our discussion of Game Theory based on the book Co-opetition.