From Brent’s Desk

In many of the educational programs, we offer there is a single one-day workshop we give that has, little by little, become one of our most important workshops. It doesn’t seem to matter if it’s in a business course, our entrepreneurship program, a leadership development curriculum or even a high-school class; it’s just that universal.

The inspiration for this workshop came when I stumbled across a little article in a campus newspaper announcing the winners of a recent inter-university computer science competition.

It seems that universities do this all the time. In addition to sporting events where football/hockey/volleyball/name-your-sport teams battle it out for court supremacy, engineering departments will compete, for example, to see who can build a vehicle to go the furthest on a single litre of fuel; math departments have competitions to see who can do… you know… “math stuff” better/faster or cheaper; and in this case, computer science departments were competing to see who could write a program that could wipe the floor with computer programs from other universities given a specific set of criteria and with no human intervention.

The Criteria

The rules for this computer science smack-down are simple. You pretend you are a spy and have made a secret “deal” with a spy from the other team. You are to meet at a prearranged time and place and exchange identical looking suitcases. You agree to hand over an ungodly amount of money and the other spy agrees to hand over the top-secret plans for their Super-Secret Inter-Continental Ballistic Laser Powered Super-Duper Thing-A-Ma-Watzit with sharks tied to their heads thingy (SSICBLPSDTAMW). In this scenario, there are four possible outcomes:

• You give each other what you had promised
•  You give each other rolled up newspaper
• You give them the money and receive rolled up newspaper
• You give them the rolled up newspaper and receive the plans for the SSICBLPSDTAMW (with sharks tied to their heads)

With the various outcomes there are also four possible sets of points awarded:

• You each gain 1 point (because each of you received what is most important to you but you had to give something of lesser value to get it).
• You each get 0 points (because you didn’t get what you wanted, but you also didn’t lose anything either)
• You lose 1 point and they gain 2 points (because you lost something of value and they have possession of both valuable items)
• You gain 2 points and they lose 1 point (because you have both valuable items and they can go suck eggs [heh heh heh])

In this little spy-game, there is one thing that is probably self-evident, but I’ll state it anyway. Regardless of the outcome, neither party can seek restitution from an authoritative 3rd party (i.e. if you get cheated, you can’t call the cops). The only other important tidbit of information is that each “spy” has to play against each other “spy” a multitude of times.

The Results

By far, the algorithm that walked away with all the marbles was actually a very simple line of code with only two little “if-then” statements. It simply said,

• If I’ve never met (played against) this other spy before, then I will assume they are honourable and I will be honourable too.
• If I have met (played against) this other spy before, then I do to them this time what they did to me the last time we met.

The Workshop

I found this a fascinating exercise with far-reaching implications. In our workshop, we give each participant a score-sheet, one black token and one white token. Then we explain the scenario and goal of the game. The goal is simple. Each player is to score as many points as they can. To play a round, each player pulls either the black or white token from behind their back in their closed fist. White signifies that they are offering the money (or the secret plans) and black means that they have stuffed their case with newspaper. Each player then reveals their token, marks their individual score, and moves on to the next round. Depending on available time and the number of players, we typically have each player meet every other player anywhere from 10 – 20 times. More is usually better as players begin to see patterns emerge which help them make longer-term strategies. We then tally everything up, place it on the board on a master score sheet, and discuss highlighted findings. What the participants don’t know is that ahead of gameplay, we secretly select an individual and give him/her instructions to play according to the rules of the winning algorithm explained above.

The math is simple. In any given exchange, if you’re honest you can either score 1 or -1 points and if you’re dishonest, you can either score 2 or 0 points. Since 2 is greater than 1 and 0 is greater than -1, one would think that it is always to your best interest to try to cheat your opponent. Indeed, typically in any workshop, there is at least one business school graduate who creates this mental matrix, thinks they have discovered a secret advantage not readily available to the average person, makes their decisions accordingly, and gets it all wrong.

When we post the scores at the end of the exercise, everyone is eager to see who won. To date, for reasons that would take to long to explain in this article, this game has always been viewed as a competition and participants are extremely pleased if they scored more than anyone else did. But strangely enough, we’ve never seen anyone score the maximum; in fact, it is not uncommon to see the highest score a whopping 50% less than the maximum score possible, and yet the “winners” (and I use the term lightly here) are usually happy with this.

Somehow, in the minds of most people, “score as many points as you can” gets translated into “score more points than your opponent.” The two statements do not mean the same thing, just as “don’t try to win” is not the same as “try to lose.” A thorough analysis of the game reveals that if we look at the maximum points available to both players per encounter instead of the maximum for a single individual player per encounter we see an entirely different picture.

In order for one player to score 2 points, his opponent must score a -1. Adding the points together, we see that the exchange only generated 1 point of actual wealth. This means that for one person to win big, someone else must lose, and not just lose in the exchange, they must lose more than what they had prior to the exchange happening.

The only time where more than one point (wealth) is generated, (and it is. coincidently, the highest total points generated in any exchange) is when both parties decide to act honorably and cooperate with each other. At this point, there are 2 points of actual wealth being generated and they are shared by both participants in the exchange. If we have 10 players who each have 10 exchanges with every other player, we see that each player has 90 separate exchanges. If by some miracle every player was honest all the time, each player would score the maximum 90 points and there would be a grand total of 900 points of total wealth generated.

If players alternated being honest and being dishonest, they would score 2 points five times and -1 five times against each other player for a grand total of 45 points and there would only be 450 points of wealth generated in the entire game.

If one player was honest and another was not every single time, the first player would score -10 and the second player would score 20. Over the entire game, you’d get 5 players with -90 points each and 5 players with 180 points each: big winners and big losers but again, only a grand total of 450 points of wealth created.

Now I know what you’re thinking… you’re saying to yourself, “I want to be that 180 point guy.” But 180 points is a theoretical maximum, and it would never work out. In actual practice, as soon as any player gives a rolled up newspaper even once, immediately his “opponent” (and now they are thought of as an opponent instead of a player) feels upset and at some point tries to get his lost point back. After that, neither is trusting of the other and often both degrade into giving a newspaper every time. When this happens, no actual transfers ever happen and everyone scores a 0 at every exchange. In addition, since all the exchanges between all the participants of the workshop take place in the same room, more often than not, others (meaning, future players) are at least marginally aware of the “Battle Royal” that just ensued. You can just imagine how they will approach future exchanges with either of these competing players.

The Logic behind the Algorithm

The winning algorithm is an ingenious thought process largely because it is so simple (the best ones usually are). But let’s break this down just a little to see what’s really going on.

Based upon the number of times we’ve hosted this workshop, we find that we can assign labels to individuals based upon how players make decisions. The four archetypical types we’ve identified are:

1. 1. The cutthroat – This person has seen the mental matrix and deduces that it’s always to their best advantage to go for the big score. They give rolled up newspapers whenever they think they can, and when they don’t, it’s simply to lull their opponent into a false sense of security before they pounce again.
   2. The idealist – This person plays with an inflated sense of morality and is honorable almost all the time.
   3. The recreational player – Sometimes you win, sometimes you lose; it’s all fun and games (until someone loses an eye).
   4. The pragmatist – This person plays at, or close to, the way that the computer algorithm plays with slight variations based upon gut instinct.

The cutthroat is very quickly not trusted so other players also give the newspaper every time. His score is often very low because while he might make a few big scores early in the game, it’s usually followed by a long string of “0’s.” He might make marginally more against every individual that he meets, and feel vindicated by that. However, since the total wealth generated is so low, his overall score is also very low. It’s a classic case of winning every battle but losing the war.

An interesting sidebar is that this player never really knows he’s losing. Because he may squeak ahead of every individual he plays against, he never sees the big picture until the end when the master scorecard is revealed. He walks away wondering how he can beat every opponent he met and still end up with one of the lowest scores on the board.

In real life, if you experienced this person in your business, you would just stop dealing with him. Real businesses like this can only survive with a constant flow of new suckers…I mean clients. This business model also won’t work in smaller communities where reputations, good or bad, grow fast because of word of mouth (hmmmm… isn’t the internet making our entire world one big “small” community?)

The one exception to the cutthroat’s ostracism would be meeting an idealist. The idealist is easy pickings for the cutthroat and this pairing will run up the score for the cutthroat (against this particular player but still only marginally higher in the big picture) and bankrupt the idealist. Again, in real life, the idealist would simply not deal with the cutthroat after the first few exchanges, but since the rules of our game are that they must all have a given number of exchanges with each participant, this forces the players to either abandon their belief system or pay the consequences. Any idealist that sticks to their beliefs and loses big can sometimes make back some of their losses with other players who feel sorry for them, but rarely enough to break even. Even in meetings with a recreational player, the player already knows what the idealist will do and might start out being mister nice-guy, but often the temptation to pocket a few extra easy points is just too great not to take advantage of, even if it’s just a little. After all, there are no consequences for bad behavior, are there?

Things are “hit and miss” with the recreational player. It is like the weekly poker game amongst a close circle of friends; sometimes you’re up (in which case you won by using your superior intellect) and sometimes you’re down (in which case it was pure dumb luck for the other guy). Over the long term though, things pretty much balance out. There are no great fortunes made and a great time was had by all.

Then there’s the pragmatist – the algorithm guy. In actual theory, there is very little difference between this guy and the idealist. The biggest difference is that pragmatist isn’t afraid to call a spade a spade and slap someone down who desperately needs to be slapped down. But there is a magic subtlety in his actions that makes a huge difference to the bottom line. First, he assumes people are honest and always gives them the benefit of the doubt. Second, he responds in kind but only to what you did to him LAST… not first. This means that he has a memory, but not a long memory; he’s not hampered by a lasting “first impression.”

This is important when engaging a new client whom he doesn’t really know yet. If it’s the cutthroat, he is able to send the message that he’s not a pushover and thus stop the long slide into oblivion that is the downfall of the idealist; with the recreational player, he allows for the fact that people can change and learn from their mistake; and when meeting the idealist, because they both start with the premise of honesty and there is nothing to derail their relationship, they both score the maximum points available. If you’re honest with him, you can always expect the same in return but first off, you must be honest.

The Wizard Behind the Curtain

Ok… some of you might recognize this as “Game Theory” and actually, as a variation of the famous “Prisoner’s Dilemma” game.

And now you’re thinking, “Well… this is all very well and nice, and it’s an entertaining way to spend a few hours, but what does it all mean for me? I mean really… these are just games… right? They have no value in the world that I live in… the real world of business, do they?”

Well…what economists call game theory, psychologists call the theory of social situations. This means it becomes a predictor of how people will actually behave in a specific situation. If you’re in business, don’t you want to know how your employees, your clients, your competitors or your suppliers will behave? Don’t you want some logical basis for making your decisions that are proven better than just following a “gut feeling?”

You bet the sweet suitcase you do. Remember when I said these little encounters act as “predictors?” Many man-made constructs such as economics, negotiations for international trade deals, and even corporate hiring and firing decisions are often based on some kind of game theory. Game theory can also win you Nobel prizes and/or Academy Awards. Indeed, the four-time Academy award-winning movie, “A Beautiful Mind” is the real-life story of John Nash, a game theorist, who won the noble prize for his ideas simply because his ideas were so useful.

Labeled the “Nash equilibrium,” his ideas have been used to analyze hostile situations like war and arms races, and also how conflict may be mitigated by repeated interaction. It has also been used to study to what extent people with different preferences can cooperate, and whether they will take risks to achieve a cooperative outcome. It has been used to study the adoption of technical standards, and also the occurrence of bank runs and currency crises. Other applications include traffic flow, how to organize auctions, the outcome of efforts exerted by multiple parties in the education process, regulatory legislation such as environmental regulations, and even penalty kicks in football (or… soccer for everyone in North America).

And if that isn’t enough, biologists are finding that game theory is used by Nature itself in designing how various species interact with other species; computer scientists believe that in order to successfully develop a working model for artificial intelligence, they must first teach robots game theory; and philosophers, ethicists, even psychologists are becoming increasingly interested in game theory. Game theory is literally everywhere.

Ok, ok, ok… I know you’re not an arms dealer, or robot designer or even a professional footballer so let me cut to the chase and describe how this little spy game can help you in your own “real” world of business.

At its simplest level, this can be thought of as a function of ethics; i.e. in each of your encounters with your clients, do you choose to be ethical and look for the win-win scenario, or do you choose to be unethical and look for the big score? Remember that word “predictor” that we talked about earlier? This predicts that honesty really is the best policy. And not just for some altruistic or religiously driven purpose; it’s simply a better fiscal policy. You will physically create more wealth both for yourself and for society in general if your day-to-day operations are built upon cooperation and trust that you do if your business is centered on competition and making “the big score.” In simple terms, acting ethically means you will make more money.

It also predicts that relationships matter and that slow and steady really does win the race. It is far better to make $1.00 every single time than it is to try to make $2.00 every once in a while. It means that as more and more clients want to do business with you more and more often, there will be more and more of those chances to make that $1.00. In simple terms, acting ethically means you will make more money.

And lastly, you really do reap what you sow. As soon as you are dishonest, even a little, it breeds mistrust for a long time, and that severely cuts into your long term profits. In simple terms, acting unethically means you will make less money.