The comments on Eilon’s last post turned into a dialogue on whether it is of any use for MBAs to learn game theory. I will make some brief comments on this.
With very few exceptions, professors at leading business schools are chosen for their research prowess and hence their skill at analytic thinking and modeling, and have spent little time if any in the business world. Many will do some consulting, but this comes later in their career and is not the basis on which they are hired. How do future managers benefit from professors who have never managed?
Experience may be everything, but it is not the only thing. Or, as Ricky puts it, “Experience is inevitable. Learning is not.” Just as important a cornerstone as experience are models by which to organize experience. The research professor will teach in part via war stories (cases), just as a business veteran would. These are not his war stories, of course, so what it the advantage of his expertise? The advantage comes via in-depth understanding of models. Why is that so important? Models organize the information from the case into well-defined causes and effects. Then you can learn not only what the successful decision was in a given case, but how to adjust this decision for related cases, and, just as important, when the concepts from the case do not apply. A good professor will be able to make clear the assumptions that go into the model, and when they do or do not apply in real life. You always may come across situations where none of the models seems to help, and have to improvise. But the same would certainly be true if you learned from non-theoretical professors; their experience might not be closely enough related to yours. Worse, it might be close enough that you think you should make similar decisions, but you miss a key difference, one which a good model would have drawn your attention to.
A source of real-life war stories that can be better understood with the help of game theory is Co-optition by Brandenburger and Nalebuff. The contents of this book are a great response to anyone who is not sure why theorists might be at a business school.
9 comments
November 12, 2010 at 5:20 pm
Fernando Fuster-Fabra Fdz.
Theory needs experimental to convert it into a law. Never forget that.
November 12, 2010 at 9:23 pm
puzzled
Prof. Weinstein:
You claims experimental work is not useful for understanding real life but none of you can give me a concrete example of what you research that is useful.
When I say I might take a finance class, you attack finance rather than offering something positive about what you teach. It’s as if everything we learn here is wrong.
You say you can teach stuff and say when it works and when it doesn’t even if your research is useless. But none of you can give me one concrete example amongst yourselves of something useful that you teach using game theory. The book is written by a HBS professor and a Yale professor. We have enough HBS cases to drive us mad about being at Kellogg- we need YOU to justify this expense education that pays your salaries. What can you do by yourself that is useful to me? I was hoping to learn something fun about your research but all I see is complaints about others and your research is math puzzles.
November 13, 2010 at 2:32 pm
pll
Puzzled,
Allow me to take a stab at it. Those ‘math puzzles’ you deride can have powerful insights and important applications. One example: auction theory and mechanism design, areas in which faculty from the school’s MEDS department have made huge contributions. What are the applications, you ask? I’ll quote Rakesh Vohra in a note he wrote for Kellogg Insight:
Another example: principal-agent models. Perhaps we cannot even think anymore about corporate governance or contracts without the tools provided by those models. I would dare to say anything that involves strategic interaction between parties has benefited from some game theoretic insight. Game theory permeates the curriculum in any school, from the core strategy class, marketing, negotiations, corporate finance.
I think, more generally, that beyond the immediate application of game theory, there is great value in learning how to think about any problem in structured, logical, way. Bear in mind, too, that research is a collective effort. There are many faculty, across universities, working on the same topic, chipping away at a problem form different angles and at different levels, from pure theory to empirical tests including experiments.
November 14, 2010 at 4:47 am
Eilon
Puzzle, I must admit that your arguments are childish. You would like US, professors at Kellogg, to prove to YOU that WE are useful to YOU (I apologize for saying that I am a Kellogg professor. Well, I have been one for quite a few years, but chose to live in the holy land instead of in the windy city). It is not enough for you that other people from our occupation proved that the occupation is useful. You need a proof from US, that WE can do useful things. You want to hear this from game theorists, but not from people in finance or in political science (mind you, people in finance were the ones who brought the current economic situation, not game theorists).
I know that if we do not answer you, you will tell all your friends that we are useless. If we do answer you, you will remain unconvinced and will still tell your friends that we are useless. But I will tell you why I may be useful to YOU. So if you need some consulting job, you can drop by at Tel Aviv. I first met Ehud Kalai 17 years ago; he will be much more useful to you than me, and he will teach you stuff that, if digested, will be very useful. But it is your choice whether to take his class or not.
A couple of years ago I was called upon to give a consulting job to a company that was going to participate in an auction. There were two participants, “my” company and the other company. The auction was a standard English auction with 20 rounds. The highest bid after 20 rounds wins. In each round, the lower bidder should have increased his bid above the currently leading bid, or leave, in which case the bidder who remained wins the auction. Simple?
Not so. What should be your bidding strategy?
Strategy 1: increase your bid as slowly as you can, until round 19. In the last round, make a high bid, in the hope that the other company gives a low bid.
Strategy 2: if the initial bid is, say, $1M, and your upper limit is, say, $21M, then increase your bid evenly, $1M in every round (or $2M every other round).
Strategy 3: increase rapidly your bid, to show to the other bidder that you are interested in the auctioned object, so that he quits early on.
Unlike Rakesh Vohra, I do not do research on auctions, and my contribution to this area is less than negligible. Nevertheless, I can apply the strategic analysis that my theoretical research taught me in the past 20 years, and make a recommendation:
If your upper limit is higher than the other firm’s upper limit, then you will get the object, at a price which is at least the upper limit of the other firm. Your goal is to bid $1 above that price. To this end, you must locate this upper limit.
Therefore if you believe that your upper limit is higher than the other firm’s upper limit, use the following strategy:
Strategy 4: increase your bid moderately fast, with the goal of locating the upper limit of the other firm.
However, if you think that the other firm’s upper limit is higher than yours, try to convince the other firm that your upper limit is lower than what it really is. This can be done in psychological means or using your bidding strategy. At the last round, bid your upper limit, hoping that they will make a bid which is lower than your upper limit.
This is a short summary of the analysis, and you (and others) may find it unsatisfactory. The bottom line is that our strategic thinking is applicable, and useful in real life situations. The exact theoretical models that we study are irrelevant. The way we think is.
Last sentence: even the decision to post this response was done for strategic reasons.
November 14, 2010 at 8:44 am
puzzled
Prof. Solan, It seems you are childish. You critisize ALL experimental work as having noting to teach about real life. But when someone asks you what your work has taught, you come up with nothing.
November 15, 2010 at 9:34 am
Eilon
Puzzled, it is clear from the correspondence that we do not understand each other. Why won’t you drop by at one of my co-contributors office, or send me an e-mail, and we can then understand what bothers you, and hopefully provide a satisfactory answer.
November 14, 2010 at 3:14 pm
czander
There is considerable controversy in America’s business schools today concerning the best method to educate budding executives. There are the demands made by corporations and their CEOs who want MBA’s ready to jump into executive roles and make significant contributions. They see the B-school as a training ground and they donate large sums of money and send their executives to expensive executive programs where they expect schools to prepare them for leadership roles. The corporation has a direct investment in selected B-schools and they have turned them into voctech corporate training programs. CEOs do not want to establish their own training programs because they find it much easier to donate a few million to their favorite B-school, offer their faculty consulting gigs, sit on B-school boards, and send their executives to a customize training program. Plus B-school deans eagerly pursue these arrangements and offer CEO’s celebrity status on their campus. But there was a downside, in the process B-schools have sold their souls, given up academic choice and freedoms, and pushed serious scholars aside in favor of “how to do it” motivational speakers and celebrity professors. A serious conflict has evolved, there are deans, corporate leaders and professors want to push forth the “corporate/practice model” of education and others who reject the voctech approach and believe the “theoretician/practioner or scholar/practioner model” of education is the correct way to educate MBA’s, and produce scholarly Ph.D.’s. Both sides of this conflict claim the other side is destroying business schools and some even claim the other side is responsible for corrupt and unethical CEO behavior. This battle is even split along ideological lines, with those pushing forth the “corporate/practice” calling “theoretical/scholars” longhair leftists. In many B-schools open warfare between the two groups exists. At the McMasters B-school the president had to step in after an internal audit raised “grave concerns” describing vicious conflict that has split the school into two camps – those from an academic background and those from a business background. The academics want the dean out and the corporate faculties want him to stay. According to Hemsworth (2010) “Even those who don’t belong to either camp say it has become difficult to work in a toxic atmosphere where many have been driven to seek prescription medicine for stress, anxiety and depression…Each accuses the other of subverting the work of the school by blocking appointments and promotions in a form of “academic mobbing” that has brought the school to an impasse. The business school has become a dysfunctional work environment.” The report maintains this problem goes back 20 years between successive deans and faculty. Is this unique- of course not, dig deep pass the niceties of the collegial climate and one would find a cesspool of nastiness and envy. In B-schools that have an open tenure process where liberal arts faculty have a say in the promotion and tenure process the corporate faculty are often doomed exacerbating conflicts between the corporate dean and the entire faculty. This causes many deans to get a building away from the academics with their own promotion and tenure process. In some cases deans create a special track for these corporate faculties called the “clinical professorships”, and they stay on forever never having to seek tenure and serve at the pleasure of the dean.
Across America deans of business schools have aligned themselves with the corporate/practice model. Why? The answer is simple, deans run their schools with two objectives in mind: obtain corporate money, and increase their ranking status in the various magazines, and they are not unrelated
November 16, 2010 at 1:51 am
Lones Smith
BTW The neologism you meant was co-opetition.
“What is a magican but a practising theorist?” — Obi-Wan Kenobi
November 17, 2010 at 6:26 pm
Jonathan Weinstein
Thanks, Lones — funny thing is, I actually googled it to check the spelling, but there are a large number of hits with my misspelling, so that didn’t help!
“This isn’t the word you’re looking for.” — Obi-Wan, paraphrased.