Notes on the Economics of Game Theory - Part I

Written by Sam Vaknin

Consider this:

Could Western management techniques be successfully implemented inrepparttar 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 arerepparttar 132675 same everywhere and are mostly rational. Practice begs to differ. Basic concepts such asrepparttar 132676 money value of time orrepparttar 132677 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 fromrepparttar 132678 workplace, for instance) than to wait for longer term (potentially, larger) benefits. Warrants (stock options) convertible torepparttar 132679 company's shares constitute a strong workplace incentive inrepparttar 132680 West (because there is an horizon and they increaserepparttar 132681 employee's welfare inrepparttar 132682 long term). Whererepparttar 132683 future is speculation speculation withers. Stock options or a small stake in his firm, will only encouragerepparttar 132684 employee to blackmailrepparttar 132685 other shareholders by paralysingrepparttar 132686 firm, to abuse his new position and will be interpreted as immunity, conferred from above, fromrepparttar 132687 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 regardrepparttar 132688 corporate environment as a conflict zone, a zero sum game (in whichrepparttar 132689 gains by some equalrepparttar 132690 losses to others). Inrepparttar 132691 West,repparttar 132692 employees participate inrepparttar 132693 increase inrepparttar 132694 firm's value. The difference between these attitudes is irreconcilable.

Now, let us consider this:

An entrepreneur is a person who is gifted at identifyingrepparttar 132695 unsatisfied needs of a market, at mobilizing and organizingrepparttar 132696 resources required to satisfy those needs and at defining a long-term strategy of development and marketing. Asrepparttar 132697 enterprise grows, two processes combine to denuderepparttar 132698 entrepreneur of some of his initial functions. The firm has ever growing needs for capital: financial, human, assets and so on. Additionally,repparttar 132699 company begins (or should begin) to interface and interact with older, better established firms. Thus,repparttar 132700 company is forced to create its first management team: a general manager withrepparttar 132701 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 maximizerepparttar 132702 value ofrepparttar 132703 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 oustrepparttar 132704 management, or undermine it, turning it into an ineffective representative relic. They assume real, though informal, control ofrepparttar 132705 firm. They do so by defining a new set of strategic goals forrepparttar 132706 firm, which call forrepparttar 132707 institution of an entrepreneurial rather than a bureaucratic type of management. These cycles of initiative-consolidation-new initiative-revolution-consolidation arerepparttar 132708 dynamos of company growth. Growth leads to maximization of value. However,repparttar 132709 players don't know or do not fully believe that they are inrepparttar 132710 process of maximizingrepparttar 132711 company's worth. Onrepparttar 132712 contrary, consciously,repparttar 132713 managers say: "Let's maximizerepparttar 132714 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 forcesrepparttar 132715 entrepreneurs to dilute their holdings (in order to raiserepparttar 132716 capital necessary to finance their initiatives). This dilution (the fracturing ofrepparttar 132717 ownership structure) is what bringsrepparttar 132718 last cycle to its end. The holdings ofrepparttar 132719 entrepreneurs are too small to materialize a coup againstrepparttar 132720 management. The management then prevails andrepparttar 132721 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 II

Written 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 ofrepparttar players are lost byrepparttar 132673 others). They can be nonzero-sum (the amount of benefits to all players can increase or decrease). Games can be cooperative (where some ofrepparttar 132674 players or all of them form coalitions) or non-cooperative (competitive). For some ofrepparttar 132675 games,repparttar 132676 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 (givenrepparttar 132677 strategies of all other players). Nash equilibria (solutions) arerepparttar 132678 most stable (it is whererepparttar 132679 system "settles down", to borrow from Chaos Theory) but they are not guaranteed to berepparttar 132680 most desirable. Considerrepparttar 132681 famous "Prisoners' Dilemma" in which both players play rationally and reachrepparttar 132682 Nash equilibrium only to discover that they could have done much better by collaborating (that is, by playing irrationally). Instead, they adoptrepparttar 132683 "Paretto-dominated", orrepparttar 132684 "Paretto-optimal", sub-optimal solution. Any outside interference withrepparttar 132685 game (for instance, legislation) will be construed as creating a NEW game, not as pushingrepparttar 132686 players to adopt a "Paretto-superior" solution.

The behaviour ofrepparttar 132687 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 ofrepparttar 132688 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 usrepparttar 132689 order of priorities ofrepparttar 132690 agent. Allrepparttar 132691 bundles that enjoyrepparttar 132692 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 revealrepparttar 132693 INTENSITY orrepparttar 132694 RELATIVE INTENSITY of a preference merely its location in a list. However, techniques are available to transformrepparttar 132695 ordinal utility function into a cardinal one.

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