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GAME THEORY

When GM's actions will have an impact on what the others do (see Exhibit 34.6), a form of game theory can help avoid misunderstandings. Using game theory,[1] the team can put themselves into the shoes of each player and ask whether they want each option to be taken (including options they do not control) and how important that option is relative to others on the list. With these assessments, it is possible to identify a natural outcome[2] – where momentum will lead the issue – as well as a danger outcome[3] and a target outcome[4] for GM. The information gathered is so rich that it can guide both strategy and tactics. Because there is a tight logical connection between the recommendations and the inputs provided by participants, decisions are often changed based on the analyses.

Since the combined knowledge of the participants about the external players and their options is usually strong, the predictions of their behavior are remarkably accurate. Even when there is disagreement or uncertainty about what other players want, the analysis can identify robust strategies or narrow the areas where additional information is needed. GM used to have a Defense Operations unit that once developed a design for a military vehicle that the designers thought could displace the Humvee[5] used by the U.S. Army. At the time, GM had recently acquired the Hummer brand (since discontinued), which sold a civilian version of the Humvee, so this idea generated significant controversy. Game theory analysis showed that the right actions for GM depended heavily on the preferences of the Army, with disagreement about what they were. GM leaders decided to ask the Army, inviting key generals to hear about the Defense Operations concept. The generals made

Game Theory

Exhibit 34.6 Game Theory

clear that they had no interest in switching from the Humvee, and further investment was avoided.

The high value that GM leaders attach to the predictions and insights that the game theory process generates is reflected in the more than 120 times the tool has been deployed since 1999. The issues have included negotiations of all types, competitive strategy, public policy strategy, crisis management, and new business development, and have covered every region and most functions. Speed and efficiency are also major attractions; a complex issue can be analyzed and action plans developed and approved in less than one week. When the Risk Management function was created, a natural home for these decision-making tools became obvious.

  • [1] Game theory is a large topic. The tool described is a practical application that predicts actions based on assessments of the options and preferences in the situation or "game."
  • [2] Natural outcome is a stable outcome (set of choices by the various players on the options they control) that will result if players do not behave strategically. It can be thought of as momentum.
  • [3] Danger outcome is a stable outcome that is worse than the natural outcome from the perspective of the project sponsor; it can result if assessments are mistaken or players make errors.
  • [4] Target outcome is a stable outcome that is the best potentially attainable by the company, given the options and preferences of the various players. It is better for the company than the natural outcome and mitigates the risk of the danger outcome.
  • [5] Commonly known as the Humvee, the High Mobility Multipurpose Wheeled Vehicle (HMMWV) is a military transport used by the U.S. Army for many functions and produced by AM General.
 
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