This paper applies game theory to examine conflicts between individual and organizational goals, arguing that rational self-interest often undermines collective outcomes. Using a hypothetical scenario involving competing managers and a real-world retail sales incentive program, the paper demonstrates how individuals acting in their own best interests can reduce overall organizational performance. The analysis highlights both the explanatory power of game theory in predicting self-interested behavior and its limitations when applied to complex, real-world environments where multiple variables, social dynamics, and alternative incentive structures are present.
The paper demonstrates the technique of theory application: introducing a formal framework (game theory), constructing an idealized scenario to illustrate its mechanics, and then testing the framework against a messier real-world case. This move — from abstraction to application to critical assessment — is a hallmark of effective analytical writing in business and social science disciplines.
The paper opens with a brief theoretical overview supported by two citations, then develops a hypothetical manager competition to illustrate self-interest overriding organizational benefit. A second section shifts to a first-person real-world observation of a retail incentive program that produced similar results. The conclusion steps back to critically evaluate where game theory succeeds and where its assumptions break down in practice. Four references anchor the claims throughout.
In game theory, it is assumed that players make decisions based on the best potential outcome from among those that will result from their choices and the projected choices of other players (Ross 2010; Levine 2010). At times it can be difficult to see whether this theory accurately describes behaviors and the decisions and assumptions that lead to them, but a brief hypothetical scenario as well as a real-world example can illustrate both the strengths and shortcomings of the theory. This paper presents such a hypothetical scenario as a means of simply yet effectively demonstrating the basic concepts and mechanisms of game theory, and also analyzes a real-world situation that is similar to the hypothetical scenario and examined from a game theory perspective — specifically as it relates to conflicts between individual and organizational goals.
In a hypothetical organization, managers are given a ten percent cut of their individual project's earnings, and the top manager in the company receives an additional bonus that is split with another manager in the event of a tie in revenue or project success. If Manager A has a project currently yielding an eighty percent return to the company that would yield one hundred percent with input from Manager B, the organization would obviously benefit from Manager B's advice. Manager A would also benefit, since the increased revenue from the project would result in increased pay. Manager B, however, would not necessarily want to share that information.
In this scenario, Manager B is harmed by helping Manager A, because Manager B becomes less likely to receive the top manager bonus — in whole or in part — if Manager A's project achieves a one hundred percent return. If all Manager B cares about is personal earnings, he or she will withhold information from Manager A in order to secure a larger individual bonus. This decision will ultimately harm the organization through lost potential revenue. This is one example of how conflicting goals can harm organizations while allowing individuals to prosper, a circumstance that has been well documented in both academic literature and the popular media (Shuttleworth 2006; Shepherd 2010; Segerstrom & Nes 2006). As game theory predicts, rational self-interest leads Manager B to choose the outcome that maximizes personal gain, even at a collective cost.
The ultimate result was a more embittered workforce and a less successful organization that did not see the type of sales growth that had been expected at the onset of the incentive program, nor that could have been achieved through a less competitive and more effectively designed program. Pitting the goals of individuals within an organization against each other is almost never in the best interest of the organization or the majority of its members, as competitions that create this type of goal opposition necessarily produce more losers than winners. This also translates to greater losses — or at least reduced benefits — for the organization as a whole (Shuttleworth 2006; Shepherd 2010; Segerstrom & Nes 2006). At the same time, there are individuals who thrive on this type of competition and perform enormously well in such scenarios, often at even greater detriment to the organization and to other individuals within it (Segerstrom & Nes 2006). Just as in the hypothetical scenario, game theory demonstrates that self-interest will prevail when placed against organizational goals.
Though the real-world situation fit the concepts of game theory fairly well, the hypothetical situation would actually involve many more complexities and considerations that are all but impossible to account for within the game theory framework. Certainly, Manager B could have brought suggestions to a superior's attention and received recognition and compensation for contributions to Manager A's project. In addition, should someone else supply the information that Manager B withheld, Manager B would likely be penalized. Game theory works only with finite and simple conditions, and these rarely exist in the real world. Understanding where the model succeeds — and where it breaks down — is essential to applying it meaningfully to organizational behavior and incentive design.
Levine, D. (2010). What is game theory? Accessed 2 December 2010.
Ross, D. (2010). Game theory. Accessed 2 December 2010. http://plato.stanford.edu/entries/game-theory/
Segerstrom, S. & Nes, L. (2006). When goals conflict but people prosper: The case of dispositional optimism. Journal of Research in Personality, 40(5), 675–693.
Shepherd, P. (2010). The evolution of goal conflict structures. Accessed 2 December 2010.
Shuttleworth, M. (2006). Conflicting goals create tension in communities. Accessed 2 December 2010.
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