Risk Management and Game Theory

risk, risk management, game theoryIn many of our KaizenBiz conversations, there is a reference to how turbulent the business environment is with the rapid changes in technology and access to one another. It is a time when small organizations can be major players in their industry (as noted in Killing Giants by Stephen Denny).  Thus, risk management is on everyone’s mind as they make business decisions for their company.

Definition of risk management

Clearly all businesses face varying types and levels of risk. Risk management is the process to identify, evaluate and plan for factors that could pose harm or obstacles to the organization.

Where game theory fits in

Many people are familiar with the “prisoner’s dilemma” which is one aspect of game theory. But game theory is more involved that just that one aspect. However, at its most basic level, it is the idea that people and organizations take into consideration benefits and risks to make decisions on what they perceive to be in their best interest. It is important to remember that there is an assumption of rational thought behind process and the decisions within situations of competition, conflict, cooperation and interdependence.

Game theory can be useful within business planning and risk management is how it illuminates connections between disparate information and provide discoveries about how trends could turn out in the future, how competitors might behave and propose multiple scenarios.

But real life is messier than academic scenarios

The Wall Street Journal reported on November 6, 2013 that in a national survey conducted by TD Bank “that middle-market and corporate CFOs are more confident about both their organizations’ ability to manage financial risk and the financial prospects for their companies, indicating the potential for increased business investment in the months ahead.” This apparent increased tolerance for risk may be another indicator of economic growth. Even so, some of the risks that are still prominent for decision makers are political uncertainties, cash flow and liquidity, emphasis on being innovative, potential interruptors from natural or human elements and sluggish economic growth.

The fly in the ointment for game theory

Since game theory presupposes that the people involved will make decisions from a rational basis, this makes things interesting. Now what is often overlooked is that rational in game theory is really about showing a transition from one  point to the next. For most decision-makers, they have a passing understanding of game theory and how it relates to the process of planning.

The challenge with risk management is trying to anticipate and set up a plan for those potential scenarios. The way game theory could be useless is in what Rob Duboff calls “atmospherics.” According to Duboff, there is a signficant gap between the decision trees and the way real-life decisions are made. This gap exists because our brains respond to sound, color, words or phrases and images which prime our later decisions. Even how or what is considered risky is subject to perception.

If risk management is susceptible to perception…

This may limit how useful game theory actually can be to identifying and managing risks. In a McKinsey and Company article, the writers noted that many managers are looking for a single or, at least, simplified answer to potential risks. The business environment is a highly dynamic place and expecting reasonable behavior and succinct solutions may be off base.

On the other hand, this same McKinsey and Company article proposes that game theory takes in various scenarios, factors and possibilities. This is actually multiple games. For those conducting the risk management, they might be looking a list of choices leading to choosing the “most robust.”

What do you think? Does game theory support better risk management or is it too academic to be useful? Join us this Friday, November 8, 2013 at 5pm GMT/12pm ET/9am PT to discuss risk managment and game theory.

How can underlying assumptions be made obvious during the decision-making process?

Are risks defined by some sort of objective understanding or are they influenced by geography and culture? Why/Why not?

What are the advantages of using game theory in risk management?

What are the disadvantages of using game theory in risk management?

What other decision making theories might be more useful to risk management?

 

 

 

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Beyond Leadership – What If Decision-Making Is More Than Data and Options?

leaders, decision-making, leadereshipIt is easy to forget how multilayered decision-making actually is. We are not always conscious of how our personality, culture, experience and circumstances combine when we are faced with choices. You can find, at any time, several blog posts and media reports of good decision-making and bad decision-making. (Although we hear more about bad decision-making).

Current reports

If you have been following the news lately, you are well aware that the US government has been shut down due to a major impasse between the two political parties. There was a mega-deal between two semi-conductor companies (Applied Materials and Tokyo Electron) which is awaiting anti-trust approval. Sears, an large American retailer, has sold off a number of its more successful locations to raise cash. Finally, there is an interesting review of the Fukushima nuclear disaster in Knowledge@Wharton blog.which asks if culture may have adversely affected how decisions were made.

Experience vs inexperience

One would think that more seasoned leaders would be more competent in their decision-making processes. Certainly, inexperienced leaders might miss pieces that need their attention. According to a post written by Wendy Lea on Venture Beat, there are two areas that could cloud or outright prevent the most effective decision-making:

  • Fixating on the grand vision
  • Focusing more on the valuation or exit strategy and not the product

For more experienced leaders, there are other possible interruptors:

  • Too much reliance on past experience or honed skills
  • Politically motivated factors
  • Disengaged from value system
  • Mismanaged resources
  • Inability to recognize opportunity
  • Lack of trust in self

Are we ignoring underlining influencers?

Most of the time, a leader’s focus is on the available data, question and possible choices. But there are other influences at hand which may need to be recognize. In the Knowledge@Wharton post, “Lessons in Leadership from the Fukushima Nuclear Disaster“, there is an interesting discussion that culture, a strong desire to make sure the plant got built and a lack of attention to long-standing historical records identifying the dangers of earthquakes and tsunamis. While the Fukushima disaster occurred in Japan, it raises the question when one looks at leaders in other parts of the world as well. The potential for a sort of social blindness or deafness coupled with ambition, greed, enthusiasm, desire and other emotions exists.

While there is much written about best leadership practices and leadership styles, it is clear that people continue to make lousy decisions. Fortunately not all of these decisions result in scandals, disasters or failures. However, questions remain…what if decision-making is more than the immediate data and options?

 Join us on Friday, October 11, 2013 at 5pm GMT/12pm ET/9am PT on the Twitter chat, #KaizenBiz to take a closer look at “Beyond Leadership – What If Decision-Making Is More Than Data and Options?”

What are the primary elements in the decision-making process?

When do you keep the focus on the question at hand vs when to look at larger picture?

How could culture actually set up environment for bad decisions?

How do we encourage leaders across industries and organizations to expand their self-awareness?

Bonus question: How could game theory support more effective decision-making?

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The Marketplace Challenge of Our Time

Tom Asacker The Business of Belief

This is guest post is by Tom Asacker who has been teaching and inspiring organizations and entrepreneurs for over 20 years. He is a professional speaker, management advisor and author of The Business of Belief, Sandbox Wisdom, A Clear Eye for Branding, A Little Less Conversation and Opportunity Screams.

How do people make decisions? How do they choose one product, service, cause or idea over a similar one? That is today’s most critical question, because nothing happens until someone makes a decision.

*Please join our guest ,Tom Asacker, on Friday, May 10th at 5pm GMT/12pm ET/9am PT for the Twitter chat, #KaizenBiz as we discuss “The Marketplace Challenge of Our Time”. Not sure how to participate? Please click here for tips and advice. Continue reading

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Behavioral Economics and Our Emotional Decision-Making

behavioral economics Economics often depends on people doing logical and rational things with their money so the markets perform in a predictable way. According to the Library of Economics and Liberty, “traditional economics conceptualizes a world populated by calculating, unemotional maximizers…” If only! If you have ever observed a bubble or other consumer behavior, you might wonder about the calculating and unemotional part.

*Please join us Friday, January 4th at 5pm BST/12pm ET/9am PT for the Twitter chat, #KaizenBiz as take a look at the business trends of 2012 and what might come in 2013. Not sure how to participate? Please click here for tips and advice.

Quick primer Continue reading

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Myths of Business Lie Underneath Our Decisions

There are a great many assumptions and conventional wisdom about business. There is an interesting critique on Strategy and Business by Betty Sue Flowers. She describes many of them as myths.

Myths?!

Stop for a moment and think about images you think of when you think about business? Some of us may think of the entrepreneur who started their business in their garage and goes on to create a company that dominates its industry. Or maybe the company that found a product serendipitously and became a household name. Gordon Gecko, a character in Wall Street is another image that comes to mind.

Myths are stories that explain a phenomenom about our world. They explain “why” and give us language when the concept is complex. They contain a message that has an important meaning. The archetypes and stories we tell about business are just as much myths as the stories told by ancient civilizations.

*Please join us Friday, December 7th at 5pm BST/12pm ET/9am PT for the Twitter chat, #KaizenBiz as we discuss “Myths of Business Lie Underneath Our Decisions”. Not sure how to participate? Please click here for tips and advice.

We don’t always pay attention to what’s underneath our choices Continue reading

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Social Media Is About Perception…Changing Our Vision

Kevin von Duuglas-Ittu Social MediaThis post is by guest blogger, Kevin von Duuglas-Ittu, (Twitter, @mediasres) the Director of Social Media for the Tonner Doll Company. We’re celebrating our 3rd anniversary of this Twitter chat as we explore Social Media, Perception and Organizational Decision-Making this Friday, July 20th, at 5pm BST/12pm ET/9am PT on #KaizenBiz.

In Social Media everything is about perception… but perhaps not in the way you think. Counter to the Marketing and PR “message control” approach to Social Media, what truly is radical about Social Media is that businesses have now a new way to perceive and this changes what they are and possibly influences how they make decisions. This new perception gives them insight into not only the World but also their own place in it. The challenge is how to become aware of this mode of perceiving and incorporate what is seen into new decision making processes.

Organize and organism

There are close conceptual connections between “organize” and “organism” and it sheds real light to consider our enterprises as living things. Living things have an inside and an outside, though the boundary can be subtly blurred. One of the most distinguishing characteristics of any organism is how it perceives the world. For instance that shark can smell blood kilometers away, or sense electrical pulses up close says something about sharks. Bats are both blind but can “see” flitting insects. Perception goes a long way in defining what an animal is, and what is possible. So any business that wants to understand itself needs to take stock in exactly how it perceives, or more specifically orients itself to the world around it.

What are the organs of perception of your business?                      

An important conceptual analytical tool in this question is John Boyd’s OODA loop. His Observe Orient Decide and Act bears close resemblance to the Kaizen PDCA Shewhart loop, with notable differences. Boyd’s OODA is a consciousness and strategy model that allows us to read businesses as if they are living things seeking to constantly orient themselves more quickly in ever changing environments. The OODA loop in a fuller schematic looks like this:

OODA LoopEssentially it is a feedback loop wherein an individual seeks to identify features and patterns in its environment, and to adapt its orientation as quickly as possible to changes, going through its loop faster than its target environment is making changes. It’s staying ahead of the breaking wave.

Speed of Feedback

One application of the OODA loop that perhaps appeals most directly to Social Media marketing is his emphasis on the speed of feedback. Rather than seeing Social Media as a new channel for company message, it is perhaps more enlightened to understand Social Media as a new mode of perception for a business, a quick-pulse, quick-twitch sensitivity that gives it striking new powers of knowing where it is and cues on how to proceed. Community managers and their spaces are no longer just low-end Customer Service features but have become human hubs of brand intelligence. Self-organized consumer consensuses – whether they be found in data or expressed in conversation – become real-time tea leaves to be read.

The problem with new sense organs though is that you can’t just plug a new mode of perceiving onto the old architecture without potentially causing a fair amount of confusion. One is ever in danger of overreacting to, or more usually censoring out completely the new information. It has no natural place in the modern Marketing business model. Its speed of awareness, the very proximity to the customer or user, do not fit easily into the time frame of long campaigns, or company customs of self-perception. Things can happen in minutes, or days in Social Media and those events can be large windows into a business’s environment and markets, keys to possibilities or dangers not otherwise seen.

Q1 If we think of your business as an animal, how does it perceive its place in the world? What are its organs of perception?

Q2 If Social Media comprises new organs of perception? How does it challenge the way business used to see? What is new in what it sees?

Q3 If Kaizen is continuous & gradual business improvement, how does the speed of Social Media enhance that?

Q4 How does the speed of Social Media perception and decision pose difficulty to Kaizen improvement?

Q5 If your company adopted a much faster decision cycle do you think the role of Social Media would be increased?

Q6 Community Managers are a new hybrid which speaks and listens as the brand. Has their position in the decision process changed? 

Q7 What business decision-making roles are most resistant to taking advantage of Social Media perception? How do you bridge this gap?

Q8 If you could imagine a business that is born with strong Social Media perception, what would it’s decision-making process be like?

About the author: Kevin von Duuglas-Ittu, currently based in Thailand, is the Director of Social Media for the Tonner Doll Company.  Interests include Social Media ethics and designing social spaces; he considers his work in Social Media an expression of his study of Spinoza.

 

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