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| Title: | Notes on the Economics of Game Theory - Part I |
| Author: | Sam Vaknin |
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Consider this:
Could Western management techniques be successfully implemented
in the countries of Central and Eastern Europe (CEE)? Granted,
they have to be adapted, modified and cannot be imported in
their entirety. But their crux, their inalienable nucleus – can
this be transported and transplanted in CEE? Theory provides us
with a positive answer. Human agents are the same everywhere and
are mostly rational. Practice begs to differ. Basic concepts
such as the money value of time or the moral and legal meaning
of property are non existent. The legal, political and economic
environments are all unpredictable. As a result, economic
players will prefer to maximize their utility immediately (steal
from the workplace, for instance) – than to wait for longer term
(potentially, larger) benefits. Warrants (stock options)
convertible to the company's shares constitute a strong
workplace incentive in the West (because there is an horizon and
they increase the employee's welfare in the long term). Where
the future is speculation – speculation withers. Stock options
or a small stake in his firm, will only encourage the employee
to blackmail the other shareholders by paralysing the firm, to
abuse his new position and will be interpreted as immunity,
conferred from above, from the consequences of illegal
activities. The very allocation of options or shares will be
interpreted as a sign of weakness, dependence and need, to be
exploited. Hierarchy is equated with slavery and employees will
rather harm their long term interests than follow instructions
or be subjected to criticism – never mind how constructive. The
employees in CEE regard the corporate environment as a conflict
zone, a zero sum game (in which the gains by some equal the
losses to others). In the West, the employees participate in the
increase in the firm's value. The difference between these
attitudes is irreconcilable.
Now, let us consider this:
An entrepreneur is a person who is gifted at identifying the
unsatisfied needs of a market, at mobilizing and organizing the
resources required to satisfy those needs and at defining a
long-term strategy of development and marketing. As the
enterprise grows, two processes combine to denude the
entrepreneur of some of his initial functions. The firm has ever
growing needs for capital: financial, human, assets and so on.
Additionally, the company begins (or should begin) to interface
and interact with older, better established firms. Thus, the
company is forced to create its first management team: a general
manager with the right doses of respectability, connections and
skills, a chief financial officer, a host of consultants and so
on. In theory – if all our properly motivated financially – all
these players (entrepreneurs and managers) will seek to maximize
the value of the firm. What happens, in reality, is that both
work to minimize it, each for its own reasons. The managers seek
to maximize their short-term utility by securing enormous pay
packages and other forms of company-dilapidating compensation.
The entrepreneurs feel that they are "strangled", "shackled",
"held back" by bureaucracy and they "rebel". They oust the
management, or undermine it, turning it into an ineffective
representative relic. They assume real, though informal, control
of the firm. They do so by defining a new set of strategic goals
for the firm, which call for the institution of an
entrepreneurial rather than a bureaucratic type of management.
These cycles of initiative-consolidation-new
initiative-revolution-consolidation are the dynamos of company
growth. Growth leads to maximization of value. However, the
players don't know or do not fully believe that they are in the
process of maximizing the company's worth. On the contrary,
consciously, the managers say: "Let's maximize the benefits that
we derive from this company, as long as we are still here." The
entrepreneurs-owners say: "We cannot tolerate this stifling
bureaucracy any longer. We prefer to have a smaller company –
but all ours." The growth cycles forces the entrepreneurs to
dilute their holdings (in order to raise the capital necessary
to finance their initiatives). This dilution (the fracturing of
the ownership structure) is what brings the last cycle to its
end. The holdings of the entrepreneurs are too small to
materialize a coup against the management. The management then
prevails and the entrepreneurs are neutralized and move on to
establish another start-up. The only thing that they leave
behind them is their names and their heirs.
We can use Game Theory methods to analyse both these situations.
Wherever we have economic players bargaining for the allocation
of scarce resources in order to attain their utility functions,
to secure the outcomes and consequences (the value, the
preference, that the player attaches to his outcomes) which are
right for them – we can use Game Theory (GT).
A short recap of the basic tenets of the theory might be in
order.
GT deals with interactions between agents, whether conscious and
intelligent – or Dennettic. A Dennettic Agent (DA) is an agent
that acts so as to influence the future allocation of resources,
but does not need to be either conscious or deliberative to do
so. A Game is the set of acts committed by 1 to n rational DA
and one a-rational (not irrational but devoid of rationality) DA
(nature, a random mechanism). At least 1 DA in a Game must
control the result of the set of acts and the DAs must be (at
least potentially) at conflict, whole or partial. This is not to
say that all the DAs aspire to the same things. They have
different priorities and preferences. They rank the likely
outcomes of their acts differently. They engage Strategies to
obtain their highest ranked outcome. A Strategy is a vector,
which details the acts, with which the DA will react in response
to all the (possible) acts by the other DAs. An agent is said to
be rational if his Strategy does guarantee the attainment of his
most preferred goal. Nature is involved by assigning
probabilities to the outcomes. An outcome, therefore, is an
allocation of resources resulting from the acts of the agents.
An agent is said to control the situation if its acts matter to
others to the extent that at least one of them is forced to
alter at least one vector (Strategy). The Consequence to the
agent is the value of a function that assigns real numbers to
each of the outcomes. The consequence represents a list of
outcomes, prioritized, ranked. It is also known as an ordinal
utility function. If the function includes relative numerical
importance measures (not only real numbers) – we call it a
Cardinal Utility Function.
(continued)
About the author:
Sam Vaknin is the author of Malignant Self Love - Narcissism
Revisited and After the Rain - How the West Lost the East. He is
a columnist for Central Europe Review, United Press
International (UPI) and eBookWeb and the editor of mental health
and Central East Europe categories in The Open Directory,
Suite101 and searcheurope.com.
Visit Sam's Web site at http://samvak.tripod.com
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