Decision Making Using Game Theory- An Introduction For Management
Transcript of Decision Making Using Game Theory- An Introduction For Management
clearly declared at the outset, their constant re-appearance in subsequent chapters (withoutany deepening investigation) gives the text arather cyclical character.
REFERENCES
Morrison, M. 2004. Rush to judgment: The lynching of ArthurAndersen & Co. Critical Perspectives on Accounting, 15:335–375.
O’Connell, B. T. 2004. Enron.con: “He that filches from me mygood name . . . makes me poor indeed.” Critical Perspec-tives on Accounting, 15: 733–749.
Stigler, G. J. 1971. The theory of economic regulation. BellJournal of Economic and Management Science, 2: 3–21.
Tinker, T., & Puxty, T. 1995. Policing accounting knowledge:The market for excuses affair. Princeton, NJ: Markus Wie-ner. London: Chapman Hall.
Watts, R. L., & Zimmerman, J. L. 1979. The demand for and thesupply of accounting theories: The market for excuses.Accounting Review, 54: 273–306.
Decision Making Using Game Theory:An Introduction for Managers, by An-thony Kelly. Cambridge: CambridgeUniversity Press, 2003.
Reviewed by Deepak Malhotra, Harvard BusinessSchool, Boston.
This well-written and well-organized bookprovides a comprehensive overview of gametheory and decision analysis. The writing is pre-cise, the examples are interesting and relevant,and the analyses are thorough. As such, thebook delivers on its promise to be “a self-contained, though by no means exhaustive,study of game theory” (p. X). However, it is lesscertain whether the book is accessible to man-agers in the way the author hopes. Kelly notesthat the book “is primarily intended for thosewho work as managers” (p. X), but it is unlikelythat managers will find it particularly useful.This is not because game theory is irrelevant tomanagerial decision making; indeed, it is per-haps critically important—a point the authormakes quite well. Rather, the problem is that thevast majority of managers will be unable tomake their way through this highly technicalbook and to understand the analyses, ideas, andconcepts contained in it. There is certainly anaudience for this book, but perhaps not manag-
ers, many or most of whom will recoil at thesight of calculus, linear algebra, and pages re-plete with variables and equations.
The interested reader will find that the bookcovers all of the material necessary for thor-oughly understanding the fundamentals ofgame theory. If anything, the author errs on theside of providing too much depth and too muchmathematical analysis; a managerial audiencemight expect and prefer less. Kelly begins withan overview of the topic and then provides abrief history of the field of game theory. Thehistory is interesting, perhaps mostly to thosewho have studied game theory in the past andare familiar with the many names and ideasmentioned.
The rest of the book is organized from theperspective of individuals who might deal withincreasingly complex decision-making situa-tions. In the first few chapters, Kelly deals withindividual decision making, particularly em-phasizing contexts in which there is risk or un-certainty. Using the idea of sequential decisionmaking as a bridge, Kelly then shifts the focus ofthe book to decision making in two-playergames. Here the difference between zero-sumand mixed-motive games is introduced, andeach type of game is carefully considered. Inparticular, Kelly discusses the different variet-ies of mixed-motive games and considers appli-cations of game theory to some traditional eco-nomic problems. The context is then made morecomplex with the consideration of repeated(rather than one-shot) games and, finally, withthe analysis of games with multiple parties.
Throughout the book, Kelly uses examplesand illustrations that help link the game theoryconcepts being introduced to real-world deci-sion problems that managers might face. Thebook ends with a chapter that discusses some ofthe critiques of game theory and provides thereader with a firmer grasp of when and how thetools of game theory might be particularly rele-vant and useful.
The book requires a high degree of fluencywith mathematics and statistics and a strongfamiliarity with the jargon of game theory. Itmoves at a very fast pace when introducing newterminology and working through mathematicalanalyses. Only a very small minority of manag-ers—even among those with MBAs—are likelyto overcome this hurdle. The problem, again, isnot that the ideas are unimportant but that the
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language is one that most managers do notspeak. Consider, for example, that most univer-sities do not require any mathematics beyondone year of calculus, even for those studentswho major in economics. The same requirementholds for most MBA programs. This book, how-ever, assumes a relatively strong workingknowledge of mathematics and concepts thatare not covered until much later, in more ad-vanced courses. For example, it is not until stu-dents take a course in linear algebra that theyfirst encounter the Lagrange method of partialderivatives. Most people have never taken sucha class and are unfamiliar with this method.However, such tools are used as early as Chap-ter 2 of the book. The author does work throughand “teach” all of the concepts that are intro-duced, but the treatment is likely to be too cur-sory for most readers.
A key strength of the book is the author’s useof examples to illustrate the concepts and toprovide opportunities for the reader to test drivethe newly acquired tools in interesting andmeaningful managerial contexts. These exam-ples also help support Kelly’s fundamentalclaim: game theory and decision analysis areimportant and perhaps critical for effectivemanagerial decision making. Indeed, one won-ders whether the entire book could be basedaround the examples; some simplification of theanalytics would still be required, but a shift infocus from working through the calculus toworking through the intuition and logic behindthe analyses might do wonders for the readabil-ity of this book. In fact, many of the ideas con-tained in the book (e.g., backward induction,Nash equilibrium, risk aversion, etc.) are actu-ally quite intuitive, but the author’s overrelianceon mathematics and rigorous analytics to con-vey the message makes it difficult for the readerto grasp the concepts. The reader would be wellserved if all of the chapters provided the intu-ition behind the concepts and analyses morecarefully and thoroughly before diving into themathematics.
All of this is perhaps more an indictment ofour education system (in which mathematics isunderemphasized) than of this book, but such aperspective does not solve the problem for theauthor. Most managers will find the book to be adifficult read. Those who are able to “do themath,” however, may find it very useful. As such,
it is still “an introduction to managers,” but itslargest audience might lie elsewhere.
This book is perhaps most appropriate as atextbook for advanced undergraduates enrolledin a game theory course. The book is very wellorganized for such a course, and all of the rele-vant material is covered. The clarity and appro-priateness of the examples might also make thisa nice book for an MBA elective course in gametheory, managerial decision making, or strate-gic decision making. Those who struggle in theMBA finance course may find it somewhat diffi-cult, but those who are not repelled by graphsand equations will get a lot out of this book.
Democratic Management: The Path toTotal Quality with Total Liberty andEquality, by Asim Sen. Lanham, MD:University Press of America, 2003.
Reviewed by Maxim Voronov, Columbia University,New York.
Asim Sen’s Democratic Management: ThePath to Total Quality with Total Liberty andEquality is an impassioned and timely reminderof the intrinsic and inescapable links betweenbusiness organizations and society. In the wakeof the post-Enron/post-Worldcom era of fingerpointing and quick fixes that fundamentallymiss the systemic nature of the problem, Senargues that one cannot truly transform businesswithout fundamentally transforming social, po-litical, and economic conditions within whichbusiness operates. He reaffirms the almost for-gotten wisdom that capitalism (or any other sys-tem for that matter) cannot sustain itself indefi-nitely unless it satisfies the people who enact it.It must provide a total quality that Sen definesas “all the materialistic and humanistic thingsthat satisfy people’s needs and wants” and thatincludes “the quality, equality and liberty as-pects of life that make most people happy” (p. 3).In his most eloquent metaphor, Sen comparestotal quality to a three-legged stool, with qual-ity, equality, and liberty being the three legs. Heargues that the absence of any leg renders thequality partial, thus rendering a society unsta-ble and prone to an eventual collapse.
The previous paragraph highlights severalnoteworthy features of the book. It is extremely
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