ASSIGNMENT ON

Game Theory: Managerial Decisions Process

A Project Report Presented to the Faculty of Business Administration in Partial Fulfillment of the Requirements for the Human Resource Planning & Development course.

COURSE TEACHER FARHEEN HASSAN ASSISTANT PROFESSOR Faculty of Business Administration Head, Dept. of Management and HRM American International University Bangladesh (AIUB) SUBMITTED BY HIMEL, NISARUL HASAN HOSSAIN, MOHAMMAD NOOR TONY, BAHAUDDIN HOSSAIN RASUL SHOURAV 12-95747-2 12-95690-2 12-96026-2 11-95242-3

Date of Submission 17 JUNE, 2013

Game Theory: Managerial Decisions Process

Game theory is a set of concepts aimed at decision making in situations of competition and conflict under specified rules. Game theory employs games of strategy but not of chance. A managerial game represents a situation where two or more participants are faced with choices of action, by which each may gain or lose, depending on what others choose to do or not to do. The final outcome of a game, therefore, is determined jointly by the strategies chosen by all participants. In business schools, game theory is closely associated with decision-theory, and is used to study situations where management-psychology can play an important part. In managerial decision process organizations top management is the one party other party is the whole organization where involve all internal and external factors in this game theory. Game theory has been applied in analysis of consequences of making a decision on tactical performance of the whole organization. Game theory is concerned with rational choice in decisions involving two or more interdependent decision makers. Its range of applicability is broad, including all decisions in which an outcome depends on the actions of two or more decision makers, called players, each having two or more ways of acting, called strategies, and sufficiently well-defined preferences among the possible outcomes to enable numerical payoffs reflecting these preferences to be assigned. Decision theory has a certain logical primacy in psychology, because decision making drives all deliberate behavior, and game theory is the portion of decision theory dealing with decisions involving managerial interdependence. Its focus is game theory applications in business discussing bargaining, unconditional moves, and vicious circles. Game theory uses mathematical models to analyze decision-making for strategy, in which one individuals decisions are based on the assumptions what the actions of other actors might be. It is in fact impossible for the decision-maker to know the complete state space and consequently all the possible actions by other players are not reasonably predictable as possibilities. The need to gather dependable decision-making information from uncooperative agents is a real business management problem.

Managerial Decision Process:

Decision-making involves a number of steps which need to be taken in a logical manner. This is treated as a rational or scientific 'decision-making process' which is lengthy and time consuming. Such lengthy process needs to be followed in order to take rational/scientific/result oriented decisions. Decision-making process prescribes some rules and guidelines as to how a decision should be taken / made. This involves many steps logically arranged. Excellent managerial decision-making accounts for the difference between businesses that grow fast and businesses that don't. Managers and entrepreneurs who rise to the top and take their companies with them have usually developed habits and systems for making difficult decisions. Here is a system of creative decision-making narrowed down to 7 core steps: 1. Identify the core problem/core opportunity The apparent complexity of business problems usually obscures the fact that most visible "problems" are merely symptoms or effects cascading from one root problem (the cause). This is a general phenomenon of systems. Complex chains of cause and effect in a system mean that the greatest changes can be brought about when adjustments are made at the root. On the other hand, identifying the core opportunity in a marketplace can be just as complex as identifying a core problem. Often, it requires the ability to mine the customer landscape to identify their "core problem", before you reverse-engineer a product or solution for it and offer that solution to the customer. This is how the problem can be diagnosed. Clear distinction should be made between the problem and the symptoms which may cloud the real issue. In brief, the manager should search the 'critical factor' at work. It is the point at which the choice applies. Similarly, while diagnosing the real problem the manager should consider causes and find out whether they are controllable or uncontrollable.

2. Brainstorm your options In this phase, your job becomes either to know or to discover the full breadth of alternatives available to you. 2 factors that differentiate successful business leaders start to show up in this phase. A manager with a great deal of experience is able to draw up a wider set of potential directions to choose from. Separately, a manager who is disciplined at execution is able to research unknown or new options at a much faster pace, and replicate the advantages of much deeper experience. 3. Analyze Options Management decision-making in today's world is an established science in its own right. There are literally hundreds of managerial thinking tools applied by managers to analyze options and make decisions. However, many of these tools are useless if the core assumptions under-girding the analysis are wrong or misguided. You must make sure that your managerial decision-making process includes ways to test assumptions as well as a system for cycling back if assumptions turn out to be wrong. Here, the following four factors should be kept in mind: Futurity of the decision, The scope of its impact, Number of qualitative considerations involved, and Uniqueness of the decision.

4. Make a Decision The point of analysis is for managerial decision-making to be a faster and better process that leads to the attainment of business goals. However, even with excellent analytical tools, a leader's personal decision-making style can affect the speed at which decisions are made, and even the quality of the final decision. Decisive managers accept that bad outcomes can result

from good decision-making procedures and take solace in the quality of their preparation and their process. There is information flood in the business world due to new developments in the field of information technology. All available information should be utilized fully for analysis of the problem. This brings clarity to all aspects of the problem. 5. Take Action Depending on the size of the organization you lead, the gap between resolution and taking action can be quite wide and time consuming. A bias for action is the single biggest determinant to making better and better decisions over the long run. There are just too many details and too much complexity in the business environment for a manager to attempt to be completely prescient. Only realistic alternatives should be considered. It is equally important to take into account time and cost constraints and psychological barriers that will restrict that number of alternatives. If necessary, group participation techniques may be used while developing alternative solutions as depending on one solution is undesirable. After the selection of the best decision, the next step is to convert the selected decision into an effective action. To paraphrase business adviser Dan Kennedy, the best chance you have is to figure out the things that don't work (and won't work) as quickly and as cheaply as possible. That requires a culture of rapid decision and action. 6. Review Results Constant monitoring is one of the commonalities found in fast growing businesses. Here, the manager has to make built-in arrangements to ensure feedback for continuously testing actual developments against the expectations. It is like checking the effectiveness of follow-up measures. Feedback is possible in the form of organized information, reports and personal observations. Feedback is necessary to decide whether the decision already taken should be continued or be modified in the light of changed conditions.

7. Implement changes The point of monitoring and tracking decisions and their results is to make improvements. Not just improvements in products and processes, but improvements in overall decision making. Making a habit of systematic change, will help you build a more nimble and profitable organization. Decision-making is important as it facilitates entire management process. Management activities are just not possible without decision-making as it is an integral aspect of management process itself. For accurate/rational decision-making attention should be given to the following points: Identification of a wide range of alternative courses of action i.e., decisions. This provides wide choice for the selection of suitable decision for follow-up actions. A careful consideration of the costs and risks of both positive and negative consequences that could follow from each alternation. Efforts should be made to search for new information relevant to further evaluation of the alternatives. This is necessary as the quality of decision depends on the quality of information used in the decision-making process. Re-examination of the positive and negative effects of all known alternatives before making a final selection. Arrangements should be made for implementing the chosen course of action including contingency plans in the event that various known risks were actually to occur. Efforts should be made to introduce creativity and rationality in the final decision taken.

Using Game Theory to Improve Managerial Decision Making

Increasingly, companies are utilizing the science of Game Theory to help them make high risk/high reward managerial decisions in highly competitive markets and situations. Modern Game Theory has been around for over 50 years old and has demonstrated an ability to generate the ideal managerial choice in a variety of different situations, companies and industries. Game Theory principles are leveraged through the use of strategy games. These games are well-

defined mathematical scenarios that encompass a set of players (individuals or firms), a set of strategies available to those players, and a payoff specification for each combination of strategies. One simple and well-known example of a strategy game, familiar to first year psychology students, is the four quadrant Prisoners Dilemma. Game Theory is a powerful tool for predicting outcomes of a group of interacting firms where an action of a single firm directly affects the payoff of other participating players. Given that each firm functions as part of a complex web of interactions, any business decision or action taken by a firm impacts multiple entities that interact with or within that firm, and vice versa. Said another way, each decision maker is a player in the game of business. Therefore, when making a decision or choosing a strategy firms must take into account the potential choices and payoffs of others, keeping in mind that while making their choices, other players are likely to think about and take into account your strategy as well. This understanding quantified through payoff calculations - enables a company to formulate their optimal strategy. Game Theory is ideal for managerial situations where competitive or individual behaviors can be modeled. These situations include: auctions (e.g., sealed project bids), bargaining activities (e.g., union vs management, pricing buy-back and revenue-sharing negotiations), product decisions (e.g., entry or exit markets), principal-agent decisions (e.g., compensation negotiations, supplier incentives) and supply chain design (e.g., capacity management, build vs out source decisions). Typically, multiple strategy games are played to model different competitors, various payoffs and potential strategies. The objective of these games is to deliver 1) A recommended set of managerial decisions to guide competitive behavior to a desirable outcome. 2) An analysis of how a series of possible managerial moves can predict various competitive outcomes. Different types of games can be utilized depending on the managerial situation, the number of players, the amount of information available and the timing constraints.

These methodologies are not without their shortcomings which need to be considered in to the strategy development process. Firstly, game theory assumes the players act rationally and in their self-interest. We know that as humans, this is not always the case. Secondly, Game Theory assumes players act strategically and consider the competitive responses of their actions. Again, our experience tells us that not every manager thinks within a managerial context. Finally, Game Theory is most effective when managers understand the expected positive and negatives payoffs of each of their actions. In reality, most companies often do not have enough knowledge of their own payoffs let alone those of their competition. Despite its shortcomings, a properly constructed game can perceptibly reduce business risk, yield valuable competitive insights, improve internal alignment around decisions and maximize managerial utility. The Economist magazine put it succinctly Managers have much to learn from game theory provided they use it to clarify their thinking, not as a substitute for business experience.

In conclusion it seems that most successful strategies are random chance and not achieved by applying a complex systems thinking approach that tries to model all the complex dependencies of actions and reactions of all players in advance. Gut feelings and guts to act are clearly more important than strategic models of business games, according to Gigerenzer. What remains for a business to improve is the need for real-time transparency to improve decisionmaking and for empowerment to translate the decisions into action. The business hierarchy is not about command and control but about proper role play in the business game. The executive needs to set strategic objectives, that are translated into targets by management, linked to goals by process owners, and executed as tasks by people skills to fulfill the customer outcome. Yes, doing business can be seen as a game, but it wont be improved by theories and methodologies, but by empowering people with information technology and the means to fulfill the goals. Dont try to out-think the other players and overanalyse the past to predict the probable future but make sure that you know what is happening NOW and provide the means to ACT. ACTION defines the future, not strategy!