Game theory: To win, you have to know which rules (not) to follow

By Jeff HanhausenJeff_Hanhausen1

“Most ball games are lost, not won.” – Casey Stengel

What do the Chicago Cubs and Qui Nguyen have in common? They are both champions in the World Series of their game. Qui Nguyen won the World Series of Poker, beating 6,737 entrants to take home the $8 million prize. Poker is a game of skill, strategy, tactics, competition and randomness.

The Chicago Cubs won the Word Series of baseball — their first in 108 years. They did it game by game, play by play, with each and every player contributing to the outcome. Baseball is also a game of skill, strategy, tactics, competition and randomness.

You might say poker looks like a game for individuals, but you’d be missing the complete story. The best players have coaches and a team behind them who participate in training and strategy. They practice and get feedback from their coaches on ways to improve their game. They assess who else is at the table and must make an assessment of their style of play to know if they are bluffing or not. Baseball has many of the same characteristics. What’s more, all of this sounds a lot like business.

It’s always good to know what game you are playing. When a winner is declared in a game, it’s a moment when people interpret what has just happened and look at their own strategies to see if anything needs to be done differently. Perhaps it’s time for a rules change, or the playing field has changed, or a whole new set of tactics is available that impacts the strategies you can execute. Did Qui Nguyen or the Chicago Cubs introduce something new and different that helped them win, and is it something to adopt? Is this a time to pivot, declaring a new direction with new actions?

Setting the rules of the game

Our company has integrated Game Theory into business practices. Many relevant distinctions come out of games that can help in constituting a competitive design. One thing to remember is that somebody invented all games. They didn’t just come out of nowhere. This is true of business as well — the first thing to happen is that somebody declares the game. The next thing is to specify a set of rules for the game.

There are four types of rules for any game. The first rule specifies the point of the game — what is at stake and how a win is declared. The second rule specifies players and actors in the game. The third rule governs the field of play, specifying what is allowed, prohibited and required for action. These first three rules of play define the basic structure of any game and what must be respected. If you’re not following these first three rules, you are not playing the game.

The fourth kind of rule concerns strategy. These kinds of rules are not constitutive to the game, meaning you can play the game without following them. If we were inventing a new game, we would not yet have rules of strategy. These are developed over time with learning, wisdom, and seeing what works and what doesn’t work. Owners, coaches and players observe games to assess what is most effective, competitive and strategic, and to see if a pivot is required. The point of any game will always be about how to win. We can cross-appropriate strategies between games, learning when to be aggressive or when to play conservative.

There is always a beginning, middle and end to games, and these have similar characteristics. In games and business, there are fundamental strategies and then specific strategies. Poker and baseball follow similar fundamental strategies, but the specifics will be very different. And of course, for a strategy to be effective, you must own the tactics to fulfill.

Take a look at your business using Game Theory. What are the constitutive rules I spoke about as the first three rules? Do all of your employees, owners, colleagues and suppliers know the rules? Then look at rule number four — strategy. Do you know the set of strategies that work and the ones that are less effective or competitive?

Jeff Hanhausen is CEO of The Hanhausen Group, which invests its expertise, network and money in a small number of private companies to produce a significant shift in the rate of growth of enterprise value. www.hanhausengroup.com. Contact him at jeff@hanhausengroup.com.

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