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Applying game theory to HR

16 November 2017

The influence of game theory, developed in the 1950s by Nobel Prize-winning mathematician John Forbes Nash Jr, has been huge. It provides a formal modelling approach for decision-makers to explore a variety of interactions among agents, and their potential outcomes.

Despite being rooted in mathematics, the impact of game theory has been felt in fields as diverse as chess, child-rearing, advertising, politics, takeovers and turnaround strategies. Famously, it was also used during the Cold War to determine the optimal scale of nuclear deterrents and, eventually, to help reduce the number of warheads.

This article considers what HR can learn from game theory, which is essentially a form of structured decision-making. It can help inform at both the individual level - such as during pay negotiations - as well as the broader level of determining the likely impact of HR initiatives.

The prisoners’ dilemma

Game theory provides a way of deciding what the optimal outcome is in a “game”. The classic example used by theorists is the prisoners’ dilemma. In this, two members of a criminal gang are arrested and imprisoned for a crime. During questioning, the prisoners face the dilemma: should they co-operate with each other and stay silent, or defect by betraying their colleague? The potential outcomes are:

  • If both cooperate and remain silent, they will each receive a low sentence of one year.
  • If both betray the other and pin the blame on them, they will each receive moderate sentence of two years.
  • If one remains silent, but has the blame pinned on them by the other, the former will receive a long sentence (three years) while the latter will be released without charge.

The two possible outcomes of cooperating and staying silent are either one year jail time or three years’ jail time. The two possible outcomes of defecting are two years’ jail time or none. Clearly, defecting offers a greater potential individual reward.

Assuming everyone is a rational and self-interested actor, this will lead to the outcome that both betray and blame each other. The result is that both receive moderate sentences, however, which is the worst outcome overall for the group overall with a total of four years’ jail time. In contrast, both co-operating is the best possible group outcome with a total of two years’ jail time.

Game theory at work

An HR variant of the prisoners’ dilemma might concern investment in staff training. A business could invest £5,000 on an educational qualification for an individual member of staff, and has identified a potential benefit of £15,000 through extra productivity and new revenue streams. In a co-operative environment, the business would make the investment, the employee and the business would both benefit from the extra revenue stream and the employee would receive a corresponding pay rise.

But in an opportunistic environment, the employee benefits more by defecting - choosing to switch jobs when the qualification was complete and gaining a larger benefit elsewhere (potentially realising the full £15,000 benefit personally). The business would receive no return on its investment. It knows that opportunism is rife both in its workforce and industry generally. So, with this as the likely outcome, the only rational decision the business can make is against making this type of investment in training its staff.

Similarly, consider an organisation with a culture of “presenteeism”: the first to go home are penalised. Clearly, all would benefit if everyone agreed to leave earlier - yet no-one does. Everyone knows their peers will defect rather than cooperate, so they must also defect or suffer negative consequences. Because each person is trying to look after their own interests, the result is that everybody ends up staying late. No one actually “wins” and the business is stuck with unproductive (and exhausted) staff.

This is exactly what happens in Japan, where “karoshi is not only killing productivity but people as well.

Cultural considerations

This sort of behaviour is all too common in workplaces where individual achievement receives a disproportionate focus, compared to the achievement of the team, department or firm. In these workplaces, variants of the prisoners’ dilemma play out every day. People working within the same organisation – even within the same team – can often work in silos and in ways that conflict with each other. The business suffers as a result.

Sometimes people are knowingly working against the good of the group, but at other times it is subconscious. Either way, poor leadership may be to blame for staff working in ways that are at odds with colleagues. Other factors leading to anti-co-operative behaviour are unreasonable expectations, aggressive deadlines and individual-focused performance criteria. To tackle these issues, businesses need to break down information barriers, build a collegiate culture with (ideally) a strong sense of “purpose”, and reward staff in co-operation-encouraging ways.

How game theory can be useful

The dynamics of human behaviour are relatively well understood, making it possible – with enough information – to make reasonable predictions and anticipate individual responses to interactions or decisions. Given this, taking a game theorist’s approach can be extremely effective when analysing problems and defining what the “right” solutions might be. Put simply, it is a methodology of putting yourself in someone else’s shoes and considering things from their point of view, then determining the likely outcome.

Over time, any individual typically demonstrates consistent behaviour patterns in response to problems or making decisions. Finding patterns in behaviour, understanding internal political dynamics and knowing the motivations of an individual or decision-maker will enable you to use foresight in developing responses to situations.

When applied to workplace scenarios, experienced HR professionals should not think of game theory as a replacement for the value of their own experience. Rather, it provides a way of clarifying and structuring their thinking, taking all relevant factors into account and playing them through to their logical end.

Properly considering likely outcomes helps to expedite effective decision-making and will mean that good ideas get implemented whilst the bad ones stay on the shelf. When discussing the merits of potential initiatives in a group, people could be tasked to adopt the position of those affected to help think through likely outcomes.

John Nash suffered from schizophrenia, which meant that he struggled with empathy and putting himself in other people’s shoes. A problem-solver by nature, developing game theory was his way of solving his own problem by trying to understand why people act in the ways that they do. His ideas on game theory became his legacy and his gift to the world, and its application to the Cold War arguably meant that he deserved a Nobel Prize for peace as much as for mathematics.

Businesses rely on people making the right decisions at the right time and bad decisions cost money. A small measure of game theory applied to your HR function could yield significant benefits. It might be time you played the game.

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