Business projects, government programs, and social activities. We make plans and projections for the activities we are going to undertake. Yet, when we actually implement the programs, all too often, the results don’t turn out as well as we had planned. Why not?
I had a client, for example, that employed a dedicated staff to provide IT support services to the company’s employees. However, the company discovered that employees were by-passing the IT staff and, instead, using knowledgeable co-workers to help with their IT problems. The time the helpful co-workers were spending on IT issues was eating into the time the helpers should have been spending on their company-assigned tasks. In this case, the company implemented a program — the provision of dedicated IT services — but employees responded to the program in an unexpected way: rather than using the dedicated staff to solve their problems, employees were turning to other coworkers. The unexpected responses of employees ended up derailing the effectiveness of the company's program for providing dedicated IT service.
Business projects, government programs, and social activities are all undertaken in social environments. They involve people. People act, react, and respond to one another’s actions and to changes in the environment. And people can act, react, and respond in “unexpected” ways. There’s a good chance that if your program did not play out as planned, it’s because you didn’t anticipate actions, reactions, or responses that people would take within the new environment.
Examples of Erroneous Assumptions
Consider the government policy of providing financial assistance to people in need, such as through disability payments, tax credits, food stamps, housing assistance, or childcare assistance. It’s natural for policymakers to assume that providing government support will enable people to regain financial independence more quickly than they would without help. Along these lines, it’s natural for policy makers to assume that beneficiaries who receive assistance will continue to undertake efforts for rehabilitation, education, job placement, and/or job advancement. In reality, however, rather than continuing to try to get back on their feet, many recipients end up reducing efforts that might improve their financial independence — even to the point of rejecting job promotions — because such efforts threaten the loss of financial assistance. So rather than helping semi-independent people regain full financial independence, financial assistance programs often end up creating permanently dependent individuals. Presumably, when they designed the programs, policymakers did not anticipate such responses by beneficiaries of aid.
In both these examples, company provision of dedicated IT services and government provision of financial assistance, program instigators assumed that parties directly affected by a program would take specific actions. And in both cases the planners’ goals were upended because program recipients ended up behaving in “unexpected” ways. Had the planners better anticipated peoples’ actions, they could have designed programs that would have had better chances of success.
Another common type of assumption activity planners make that ends up being wrong is to assume only the parties “directly” affected by the program will react or respond to the program. However, other parties who are “indirectly” affected often unexpectedly end up reacting or responding to the program as well. In many cases, these “indirect actions” can also stymie planners’ intentions.
Consider the case of government-backed student loans. Having an educated population benefits all of society. It’s natural, then, to think government should subsidize college attendance. In fact, it seems to be a win-win situation: taxpayers help students pay for college, more people become educated, society’s productivity increases, and everyone is better off. In practice, however, when government provides widespread loans for education, colleges respond by raising their tuitions. More people do become educated, but they leave college with large amounts of debt. In many cases, the debt becomes an impediment to living a better life. In this example, Policymakers failed to anticipate responses by college administrators to the widespread availability of student loans: higher tuitions. In this case, rather than students and society benefitting, the real beneficiaries have been the colleges, who have been generating more revenues at the expense of students and society. This is an example in which policymakers failed to anticipate responses by third-party participants (college administrators) to increased availability of student loans.
In business, there’s a classic example of unanticipated third-party actions that often end up confounding a business’ plans: A company promotes a new product or service, only to be unexpectedly challenged by a competitor. Specifically, in response to the company’s new offering, a rival provides a similar promotion of a worthy alternative. The competitors’ response ends up hindering the success of the company’s new promotion.
Again, in both these latter examples, had the planners better anticipated actions by third-party players, they could have designed programs that would have had a better chance of success.
Summary of Erroneous Assumptions Planners Make
To summarize, activity planners generally make assumptions about how they think parties will respond to new projects or programs. Often, these assumptions end up being wrong, that is, parties respond to the new program with unexpected behavior. Unexpected behavior prevents planners from realizing the full impact of their programs. Common types of erroneous assumptions include:
- Planners assume parties will take certain actions, but the parties end up taking different actions.
- Planners assume parties will follow the rules, not break the law, not free-ride on the actions of others, and not game the system, but parties do end up acting “inappropriately.”
- Planners assume parties will do their jobs in a timely and effective manner, but parties end up dawdling or doing a substandard job.
- Planners assume that all the actions taken by parties remain unchanged, except for those directly affected by the new program. However, “direct” and “indirect” parties end up changing their actions in response to the new program.
Game theory helps prevent planners from making these types of erroneous assumptions. It forces planners to specifically consider alternative actions available to anyone who might be affected by the program at issue. Planners then predict which actions parties will most likely take, based on the specific environment and incentives faced by each affected party.
What Is Game Theory?
A Game is a situation in which one person’s payoff is affected by the actions other players take. Most simply, you and I are in a game if what you do affects what I get.
Game theory is a tool that’s used to “map out” particular situations and figure out what is likely to happen under different scenarios. In the example above, I want you to do what’s best for me. However, you’re more likely to do what’s best for you. Knowing what’s best for you will help me understand what you are likely to do. This knowledge enables me to tailor my actions to yours so I can maximize my eventual payoff.
More specifically, the use of game theory forces analysts to better understand the dynamics of a situation:
- What each of the players cares about,
- Which options (actions) are available to each player,
- How other players’ actions affect each player’s payoffs, and
- Which actions each of the players are more likely to take under different circumstances.
Perhaps most importantly, the use of game theory also helps analysts understand how they might change the environment so as to encourage more favorable outcomes.
In some cases, game theory is employed by means of modeling situations using mathematical equations. In these cases, the equations can be used either to solve for optimal solutions and/or to generate simulations to see how the situation plays out under different scenarios.
However, game theory can also be employed using less rigorous methods. Most situations can be mapped out visually and textually, and then one can use those mappings to better understand situations and draw conclusions.