Game Theory for Business, A Primer in Strategic Gaming by Paul Papayoanou

Dr. Papayoanou has written a clear, complete, interesting, and concise guide to applying game theory in business situations. He takes a uniquely practical yet rigorous approach with both the book and his consulting projects. As a DA practitioner and having spent extensive time with Dr. Papayoanou's text, my conclusion is that DA is to checkers as Strategic Gaming is to chess: it represents a higher, more difficult, yet more powerful level of thinking. We are very excited about this book!

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Game Theory for Business

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ISBN 0964793873. Library of Congress Control Number (LCCN): 2010942593.

Digital Edition: ISBN 0964793881 (ISBN 13: 9780964793880)

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Academic Usage

Game Theory for Business can be utilized as a book of supplemental readings for MBA courses on negotiation and for decision analysis courses; Wharton and Virginia Tech are among the business schools using this excellent graduate-level text. Dr. Papayoanou's clear explanation of Game Theory topics, especially framing, can help students understand when Game Theory is applicable in business situations. Contact us for additional resources and information.

Here is a link to Game Theory for Business Study Questions (300 KB PDF file). Professors: contact us for the answer key.

From the Back Cover

Business executives, managers, and negotiators regularly interact in ways that resemble a game of chess. Yet while game theory is the leading tool in academia for analyzing such interdependent choices, its use in the business world has been limited by its perceived lack of practicality. Until now, that is. Game Theory for Business: A Primer in Strategic Gaming outlines a straightforward, practical approach for using game theory. The book demonstrates how Strategic Gaming has, can, and should be applied to help savvy strategists and negotiators shape and play the game of business effectively.

Reviews


Game Theory for Business

“Game theory has, at long last, lived up to its academic promise in the business world. Unlike qualitative or black-box approaches to game theory, Strategic Gaming provides a straightforward, transparent, and rigorous way of applying game theory to generate valuable insights to many critical business issues. A must read from the leading thinker and practitioner of applied game theory.” —Steve Galatis, Associate Director, Portfolio and Asset Strategy, Bristol-Myers Squibb


“Dr. Papayoanou’s Strategic Gaming approach truly brings clarity to the decision maker. Its compatibility with decision analysis makes it a logical and natural enhancement to an executive’s analytical toolbox. The transparency of the dialog and sequential progression throughout the process facilitates alignment of all participants.” —Larry Neal, Jr., Manager, Decision Analysis Consulting, Chevron Project Resources Co.

About Game Theory for Business

At the Orlando INFORMS conference, spring, 2010, Paul came up to me, introduced himself, and asked if we would have interest in publishing his book on game theory. I was immediately interested, as I had heard presentations on game theory at Chevron (where I work as a decision analyst or any other role that comes down the road) and I had heard good things about Paul and his company, SGG.

The first step was to read Paul’s manuscript and dive into the material. As a result, I had a couple of reactions to Paul’s book. First, Paul’s writing is clear and he makes a complex topic easy to understand and interesting. Second, it seems to me that decision analysis is to game theory as checkers is to chess: game theory is a complex and challenging way of thinking. It can make a powerful addition to the analyst’s tool box, but it isn’t easy! You really have to think about this stuff – thank goodness for people like Paul who have figured out how to make it work and how to use it to add value in business situations.

Our goal in publishing this book is to provide an introduction for the practicing manager and his/her support staff concerning the powerful concepts of Strategic Gaming so that you can recognize situations where it can add value. Even though you probably won’t be able to complete a full rigorous analysis yourself after reading the book, you should be able to (1) apply the concepts and the frameworks, and (2) recognize situations where an outside resource like Paul and SGG could help you add significantly to your bottom line.

Debbie and I are very grateful to Paul for seeking us out and pursuing this project. As Paul mentioned, thank you to Heather Reitze for a very attractive cover design. We also are thankful to the decision analysis community that has supported us in our DA and publishing endeavors, beginning with Tom Sciance, Conoco and SDG, leading to David Skinner, Gary Bush, the DSI gang, Bob Winkler, Pat Leach, DAAG, and now to Chevron (which recently won an INFORMS prize for DA implementation).

A Note from the Author – Paul Papayoanou

"I was a professor for more years than I care to confess. But then I wanted to do something more practical and rewarding for myself and for others. I decided to leave academia and venture into the business world. I thought I could use my knowledge and skill with game theory, a tool I used as an academic, to help companies make better strategic decisions. After all, in academia game theory is widely considered to be the leading tool for gaining insight into competitive and cooperative dilemmas, which most companies face regularly. So I crafted a simple and practical approach for using game theory, now called Strategic Gaming, and started a consulting practice.

"In developing my niche consulting practice, I talked with many consultants and business people and had the good fortune to work on some very interesting projects. I was heartened to discover that my offering could provide great value to clients — indeed, greater value than I ever expected.

"Yet I was also amazed to learn that many companies were all too willing to avoid thinking seriously about action-reaction dynamics, leaving significant value on the table. As a former academic, it was hard to believe that strategic decisions and deals worth tens or hundreds of millions of dollars, even billions, are often left to guesswork, instinct, and rules of thumb rather than careful strategic analysis.

"This reality cut two ways for me. On the one hand, it provided opportunity. If every, or even most, companies were rational profit-maximizers (as economic texts assume they are), and if they had the appropriate tools at their disposal, there would be little need for my services. Companies would think through their strategic alternatives and choose optimally. Indeed, this was the type of underlying assumption behind the academic work I produced in my previous career. In the business world though, I found such an assumption to be far from the truth, so there were clear business opportunities. With Strategic Gaming, I could help my clients find and exploit strategic advantages to realize substantial added value.

"On the other hand, this reality meant that selling my services could prove to be very difficult. All too often, executives, managers, and negotiators were more than willing to act in a suboptimal manner. Major negotiations and strategic decisions would be left to water cooler conversations, intuition, and guesswork. Many told me that little more could be done given the situation’s complexities, uncertainties, and/or time constraints. In other cases, executives were content to stick with the “same old” tools and approaches; it did not matter that these methods could not adequately surface and analyze action-reaction dynamics.

"Yet some wanted to try my game-theoretic approach and hired me. These clients viewed Strategic Gaming as a vast improvement over their standard approaches to strategy and negotiations. Time and again these clients said that Strategic Gaming gave them structure, clarity, and valuable strategic insights they would not otherwise have realized. Clients learned to think and act more strategically and to capture great value because Strategic Gaming helped them to shape and play the game of business more effectively. The benefits even extended beyond particular engagements–the approach had far-reaching and long-term implications for the way many clients approached their businesses. As one client commented, 'This changed the whole way I think about my business.'

"This book demonstrates how Strategic Gaming has, can, and should be applied to help executives, managers, and negotiators develop robust, high value strategies and tactics. While there are a few books that discuss how game theory should be used to make business decisions, none elucidate a practical process for doing so. This primer details how Strategic Gaming can be applied in the business world to help large and small companies in a wide range of industries. With this primer, savvy strategists and negotiators will see that there is a practical methodology for shaping and playing the game of business effectively."


From the Book: Table of Contents


Why Game Theory for Business ............................................... 1
 Game Theory’s Promise..................................................... 4
 Nash’s Contribution and Schelling’s Adaptation............................ 5
 Academia versus the Business World........................................ 6
 Game Theory for Business.................................................. 8
Overview of the Strategic Gaming Process .................................. 11
 When to Use Game Theory.................................................. 11
 The 3Cs.................................................................. 17
 Coordination Games....................................................... 18
 Collaboration Games...................................................... 19
 Competitive Games........................................................ 21
 Overview of the Strategic Gaming Process................................. 24
 Five Questions........................................................... 24
 Three Stages............................................................. 25
 Illustration of the Process.............................................. 26
Dynamic Framing ........................................................... 35
 Background Assessment and Scoping........................................ 36
 Players.................................................................. 38
 Choices and Sequence..................................................... 41
 Uncertainties............................................................ 47
 Summary and Other Thoughts............................................... 51
Strategy Evaluation ....................................................... 55
 Determining Payoffs...................................................... 56
 Quantifying Uncertainties................................................ 62
 Analyzing Game Trees..................................................... 65
 Exploit Game Theory’s “Rigorous Flexibility”............................. 90
 Beyond the Game Models: Drilling Down on the Numbers..................... 91
 Closing Thoughts......................................................... 95
Execution Planning ........................................................ 97
 Changing the Game........................................................ 98
 Developing Tactics....................................................... 99
 Building a Dynamic Road Map............................................. 108
 Ensuring Alignment...................................................... 111
 Conclusion.............................................................. 113
Coordination Games ....................................................... 117
 Negotiations with a Powerful Supplier................................... 119
 Negotiation of a Pharmaceutical Marketing Agreement..................... 123
Collaboration Games ...................................................... 131
 Gaining Alignment in an Oil & Gas JV.................................... 132
Competitive Games ........................................................ 141
 High Tech Competitive Risk.............................................. 141
 Rethinking VOI: How the Game Changes Things............................. 147
Integrating Strategic Gaming into Your Business .......................... 153
 Diagnosing Game Issues.................................................. 154
 Decision-making Processes and Strategic Gaming.......................... 156
 The Leadership Difference............................................... 163
Appendix: Game Theory Diagnostic Tool .................................... 165
References ............................................................... 169
Index .................................................................... 171
Biography ................................................................ 173