Notes on the Economics of Game Theory - Part IWritten by Sam Vaknin
Could Western management techniques be successfully implemented in 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 same everywhere and are mostly rational. Practice begs to differ. Basic concepts such as money value of time or 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 workplace, for instance) – than to wait for longer term (potentially, larger) benefits. Warrants (stock options) convertible to company's shares constitute a strong workplace incentive in West (because there is an horizon and they increase employee's welfare in long term). Where future is speculation – speculation withers. Stock options or a small stake in his firm, will only encourage employee to blackmail other shareholders by paralysing firm, to abuse his new position and will be interpreted as immunity, conferred from above, from 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 corporate environment as a conflict zone, a zero sum game (in which gains by some equal losses to others). In West, employees participate in increase in 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 unsatisfied needs of a market, at mobilizing and organizing resources required to satisfy those needs and at defining a long-term strategy of development and marketing. As enterprise grows, two processes combine to denude entrepreneur of some of his initial functions. The firm has ever growing needs for capital: financial, human, assets and so on. Additionally, company begins (or should begin) to interface and interact with older, better established firms. Thus, company is forced to create its first management team: a general manager with 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 value of 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 management, or undermine it, turning it into an ineffective representative relic. They assume real, though informal, control of firm. They do so by defining a new set of strategic goals for firm, which call for institution of an entrepreneurial rather than a bureaucratic type of management. These cycles of initiative-consolidation-new initiative-revolution-consolidation are dynamos of company growth. Growth leads to maximization of value. However, players don't know or do not fully believe that they are in process of maximizing company's worth. On contrary, consciously, managers say: "Let's maximize 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 entrepreneurs to dilute their holdings (in order to raise capital necessary to finance their initiatives). This dilution (the fracturing of ownership structure) is what brings last cycle to its end. The holdings of entrepreneurs are too small to materialize a coup against management. The management then prevails and 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.
Notes on the Economics of Game Theory - Part IIWritten by Sam Vaknin
Games, naturally, can consist of one player, two players and more than two players (n-players). They can be zero (or fixed) - sum (the sum of benefits is fixed and whatever gains made by one of players are lost by others). They can be nonzero-sum (the amount of benefits to all players can increase or decrease). Games can be cooperative (where some of players or all of them form coalitions) – or non-cooperative (competitive). For some of games, solutions are called Nash equilibria. They are sets of strategies constructed so that an agent which adopts them (and, as a result, secures a certain outcome) will have no incentive to switch over to other strategies (given strategies of all other players). Nash equilibria (solutions) are most stable (it is where system "settles down", to borrow from Chaos Theory) – but they are not guaranteed to be most desirable. Consider famous "Prisoners' Dilemma" in which both players play rationally and reach Nash equilibrium only to discover that they could have done much better by collaborating (that is, by playing irrationally). Instead, they adopt "Paretto-dominated", or "Paretto-optimal", sub-optimal solution. Any outside interference with game (for instance, legislation) will be construed as creating a NEW game, not as pushing players to adopt a "Paretto-superior" solution.
The behaviour of players reveals to us their order of preferences. This is called "Preference Ordering" or "Revealed Preference Theory". Agents are faced with sets of possible states of world (=allocations of resources, to be more economically inclined). These are called "Bundles". In certain cases they can trade their bundles, swap them with others. The evidence of these swaps will inevitably reveal to us order of priorities of agent. All bundles that enjoy same ranking by a given agent – are this agent's "Indifference Sets". The construction of an Ordinal Utility Function is, thus, made simple. The indifference sets are numbered from 1 to n. These ordinals do not reveal INTENSITY or RELATIVE INTENSITY of a preference – merely its location in a list. However, techniques are available to transform ordinal utility function – into a cardinal one.