March 10, 2012

Decision making using game theory

prisonerMost people who have studied economics are familiar with game theory and the prisoner's dilemma, as a very well-known example of it. According to this example, the outcome of this decision is that both prisoners should not betray each other so that a win-win situation can exist and be sentenced for less years.

During the RDM module we didn't mention this way of making decisions although is not very difficult to understand. In the literature there are many articles that discuss this subject, where using game theory can help organisations make decisions. However, despite the very clear 'instructions' that game theory provides and especially when someone knows about this example, in fact people tend to make the wrong decision!And why is that? To my mind this happens so that anyone can protect itself, as most of us would do in a similar situation.

And a very illustrative situation of this can be seen at the 'Bank Job' (an English TV game show). At the final stage of it, the two remaining contestants have to decide about a great deal of money. Both of them are given two briefcases, one full of money and one full of newspapers. The two players then open slightly the briefcases so that they can know where the money are and then give each other whatever briefcase they think. In order to both win the money though, they have to give each other the briefcases with the money, otherwise if they give the newspapers the money goes to previous players who didn't make it to the final. What happened actually is that out of greediness probably both players gave each other the wrong briefcase. Thus, as we can see, although they knew what they should do, they actually did the wrong.

Therefore, imagine what happens in companies and situations that where a win-win outcome is absolutely achievable, but instead they fool themselves out of protection or whatever else reason.

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