How to use game theory at the office

Defecting may be a dominant strategy, but cooperation and being a risk-taker can also pay

GAME theory isn’t often associated with day-to-day life. Developed as a mathematical technique for studying complex, multi-party interactions (by the likes of John Nash, famously portrayed by Russell Crowe in the film A Beautiful Mind), it’s probably best-known as the tool of Cold War military generals calculating the optimal scale of nuclear deterrents. But at root, says economist James Miller in his book Game Theory at Work, the discipline “studies how smart, ruthless people should act and interact in strategic settings.” Economists and mathematicians have spent years analysing the optimal ways to act in common games, and a surprising number have applications in office life.

Perhaps the most famous of all games is the prisoners’ dilemma. Imagine you’re one of two criminals under police questioning. Ideally, you’d cooperate, both keep silent and both get a minor sentence. But the payoffs are such that you’re better-off providing evidence against your partner (defecting), blaming it all on them. You’ll still do some time in jail if they also defect, but it’ll be less than if you kept silent and allowed them to saddle you with total responsibility. And if your partner in crime keeps silent, you’ll get off scott-free by blaming it on them – defecting is the “dominant strategy.”

A similar dynamic could be at play in many offices, says Alex Edmans of the London Business School. “In an investment bank, for example, all analysts would be better-off individually if they could agree not to stay past midnight.” But when you break down the incentives (an extra £5,000 bonus for demonstrating hard work, say) each individual analyst is better-off defecting and staying late. If you’re the only one to leave on time, it’ll look bad in front of the management. “And since you know that your peers will defect, you have to. The result is that everybody ends up working ridiculous hours.”

If this all sounds a bit cloak and dagger, don’t despair. Game theory proves that it’s often best to cooperate in the long term. If you played prisoners’ dilemma repeatedly, defecting at every opportunity, eventually nobody would be willing to be your partner in crime. And the same logic goes for office snitching. It might pay immediately to snitch on colleagues slacking off, but eventually you’d become an outcast. These iterative games, originating in the work of mathematical psychologist Anatol Rapoport, are known as “tit for tat”, and they also explain why honesty is often the best policy for businesses – ripping people off will slowly erode your customer base.

Consistency is an asset in business – people like reliable colleagues. But when it comes to strategic negotiations, according to Miller, unpredictability can pay. Imagine how much more potent the Soviet threat would have been if the US saw Nikita Khrushchev as insane, genuinely uncaring of the prospect of nuclear annihilation. The US would have been forced into a far more cautious stance.

This principle applies to smaller-scale standoffs – pay negotiations, for example. “It might be beneficial if your boss thought that if he turned you down you would get mad and quit, even if quitting would not be in your own best interest,” says Miller. Crucially, it’s not whether you actually intend to quit that’s relevant. All that matters is that the threat is perceived as realistic and is factored into the calculations of the opposing player (your boss). Building a reputation as a ruthless risk-taker might put some weight behind negotiating threats.


Close My Deal
Strategising takes practice, and Close My Deal provides you with a range of negotiation scenarios to help hone your skills. Carry out the whole bargaining process against various computerised opponents, making use of the app’s step-by-step tips guiding you at each stage. Also comes with video examples demonstrating best negotiating practice.