Too Pat to Open and Too Cool to Bluff

Strategy in Poker, Business & War
John McDonald

strategyPop quiz:

1. Select the answer below that best completes the following sentence. Game Theory is _________.

a. a California band that worked during the 1980s
b. the subject of the bestselling book and hit film, A Beautiful Mind
c. an advanced branch of mathematics often found to result in migraines and other mental trauma
d. the secret weapon of CEOs in their endless quest to maximize shareholder value
e. all of the above

I’m pretty sure you know the answer even if you don’t know the band. (They’re worth checking out). Yet there was a time, 85 or so years ago, when such a thing didn’t exist. And even when the theory began to be worked out it was mostly confined to the academy. The present volume, originally published in 1950, grew out of a series of articles that first appeared in Fortune magazine in 1948.

It’s fair to say that McDonald‘s articles and the book mark the emergence of the theory from the hallowed halls of its origins into the broader marketplace of ideas. Ours is a commercial culture; if you can’t use an idea to make money it has little value. Call it co-optation or call it inevitable, game theory has been a part of business strategy ever since it emerged on the playing field.

john-von-neumann-1903 t o1957

John von Neumann 1903-1957

The foundational mathematics of game theory were worked out by John von Neumann and Oskar Morgenstern at Princeton University in the 1920s. The math, science and IT crowd are well aware of von Neumann–without him we might have taken longer to get computers and thermonuclear weapons. It might also have spared us such silliness as Mutually Assured Destruction (MAD), one of those Cold War strategies rooted in higher mathematics that sound insane to the innumerate man or woman on the street.

Yet such strategies are rooted in game theory. This is the natural point to explicate a little bit of it to show how it works. Except that I fear I’d make a hash of it. Let me grossly oversimplify: it’s about choices. (Game, in the context of math, resembles anything but your beloved worn out Parcheesi board.) So in the infamous nuclear strategy mentioned above, two sides, each capable of annihilating the other many times over, do not do so because they recognize that to destroy the enemy is to destroy oneself.

When the math goes wrong you can KYAG.

When the math goes wrong you can KYAG. A graphic rendering of launches and counter-launches by the world’s dominant nuclear pwoers.

As I said, grossly oversimplified.

More importantly, do you really need PhD-level math to dream up the doctrine of nuclear deterrence? There’s plain English for the goal–self-preservation–and even for why both sides should buy in: enlightened self-interest. How much does either of those change just because you can constantly reassess and assign probabilities?

Those probabilities, in fact, may create their own set of problems. There’s something about a number on a page that gives people comfort even if they may not understand what the number represents. You could argue that’s exactly what happened during the financial crisis.

We sat down for a game I cut my deck to the Queen of Spades but the cards were all the sameDire Wolf words by Robert Hunter music by Jerry Garcia

The wolf came in, I got my cards
We sat down for a game
I cut my deck to the Queen of Spades
but the cards were all the same
Dire Wolf

Words by Robert Hunter, music by Jerry Garcia
Borrowed from http://crowhillalmanacdirewolf.blogspot.ca/ 

But such things were far in the future when McDonald was writing, von Neumann was cogitating and Nash was divining his equilibrium. Why do mathematicians work on this sort of thing? Probably for the same reason that people climb Everest: because it’s there. More likely it’s just how they apprehend reality using their dominant intelligence as novelists do with theirs.

The book strives to be clear and it does so using poker as an illustrative game. Often portrayed as the game that settled the American West, you can understand the appeal of poker to the business reader. They all know the rules and the strategies for winning and it’s not dissimilar from business, at  least in theory. No less a person than Richard M. Nixon, a member of Congress when McDonald published,  reportedly earned enough of a stake playing poker to launch his career in politics.

I’m not quite certain what impact, if any, the book or the articles had on the course of business. But I don’t claim to be well-versed in the literature and I’m infamous for translating business-speak into plain English and ideas from disciplines more familiar to me.

A full house, which tops all but two hands.

A full house, which tops all but two hands.

I’ve done plenty of scenario planning and modeling during my career, however, even assigning probabilities to desired actions. But we’re talking marginal increases in small percentages. I’ve never bet the farm in business (or, for that matter, sitting at the green baize.) So I’ve never had to wrap my head around these concepts in practice.  No doubt, someone has.

I remember a conversation I had with a CEO I worked under, though,  which probably took place about 15 years ago. He had all those things one looks for in a CEO–the HBS pedigree, the resume that included turnaround of a Fortune 500 corporation, the boot-black hair and dead, Husky-blue eyes. He was describing his job and he said something like this: “I’m like a banker. I decide what businesses we’re going to put our money in to make more money.”

No higher math needed.

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One thought on “Too Pat to Open and Too Cool to Bluff

  1. Pingback: Be Fire Next Time | An Honest Con

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