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Incorporating Ethical Considerations into Business Application of the Game Theory-Based Classroom Game Sylwia E Starnawska, MBA, Ph.D. Assistant Professor,

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Presentation on theme: "Incorporating Ethical Considerations into Business Application of the Game Theory-Based Classroom Game Sylwia E Starnawska, MBA, Ph.D. Assistant Professor,"— Presentation transcript:

1 Incorporating Ethical Considerations into Business Application of the Game Theory-Based Classroom Game Sylwia E Starnawska, MBA, Ph.D. Assistant Professor, Business Administration School for Graduate Studies SUNY - Empire State College

2 “It is indeed true that "It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own interest" (Smith, 1937, vol. I, p. ii). And just as butcher, brewer, and baker generally act with regard to their own interest, so too do their customers. But if, on entering the butcher's shop as an habitual customer I find him collapsing from a heart attack, and I merely remark 'Ah! Not in a position to sell me my meat today, I see,' and proceed immediately to his competitor's store to complete my purchase, I will have obviously and grossly damaged my whole relationship to him, including my economic relationship, although I will have done nothing contrary to the norms of the market. Aiasdair Maclntyre Dependent Rational Animals (1999)” Cited after Dobson (2005) Smith, Adam. 1937. Wealth of Nations. New York: Modem Library (originally published in 1776).

3 Theoretical framework interdisciplinary approach Biology: selfishness vs altruism (naïve Darwinist belief) (Dobson, 2005) Mathematics: Nash equilibrium Philosophy: Intercompany collaboration (an Aristotle’s assumption about human nature) (Rocha & Miles, 2009), Kant’s conflict between individual and collective rationality, utilitarian philosophy with moral rationale (White, 2009) (Gibson, 2003) Socio-Economics (moral reflection on dictator's game as an option for altruism) (Cappelen, Hole, Sørensen& Tungodden, 2011) Sociology: fairness theories (bargaining & negotiating) Ethics: moral appeal, moral suasion and voluntary contribution, moral standard, golden rule (Dal Bó & Dal Bó, 2014) Economics: self –interest as a driving force of market participants, competitive or cooperative business strategies Business: corporate governance, corporate culture and personhood, managerial decision making and strategic choices, the Corporate Code of Conduct (Francés-Gómez& del Rio, 2008) Education: experiential learning, classroom exercise

4 Literature review The Folk Theorem for repeated games - accurate observation alone, however costly, enables efficient cooperation in general, repeated games (Miyagawa, Miyahara & Sekiguchi, 2008) - in the infinitely repeated version of the game, provided players are sufficiently patient, there is a Nash equilibrium such that both players cooperate on the equilibrium path The Trust- Reciprocity Hypothesis - through preconceptions of other’s expectations noticeably more reciprocity observed (Lacour, 2012) Moral balancing - altering players preferences via self-image (Ploner & Regner, 2013) Trolley Problem and response – reasoning manipulation (Lanteri, Chelini & Rizzello, 2008). Rationality model via procedural utility incorporated into cooperative behaviors - incentivized PD (Menestrel, 2006) Entrepreneurship – those talented with entrepreneurial spirit are more selfish and will not forego individual gain (Weitzel, Urbig, Desai, Sanders & Acs, 2010). CSR – response to social expectations via marketing decisions (Martin, Johnson, & French, 2011) The Lost Wallet Game – no communication, one- shot

5 Literature review - educational experiments Students who took the ethics module (1h) had higher rates of cooperation than students without the ethics module, as it promoted cooperation, based on the Prisoner’s Dilemma 2x2 matrix, with two payers, played only once with both having dominant strategy, on 154 participants (77 pairs) in Fall 2000 courses (James & Cohen, 2004) Examples of the PD’s based classroom experiments for teaching ethical decision making: (Gibson, 2003), (Campbell, 2004)

6 Prisoner’s Dilemma Prisoner B stays silent (cooperates) Prisoner B betrays (defects) Prisoner A stays silent (cooperates) Each serves 1 year Prisoner A: 3 years Prisoner B: goes free Prisoner A betrays (defects) Prisoner A: goes free Prisoner B: 3 years Each serves 2 years's_dilemma

7 Issues in the Game Payoffs (fixed or random) and scenarios Self-interest vs. altruism (or other motivations or preferences) Options: to cooperate (compliance) or to defect (cheat) Individual vs. collective rationality No loyalty to each other, not betrayal, no opportunity for retribution or reward outside the game Interdependence Dominant strategy (rational choice in decision-making) Nash equilibrium (not Pareto efficient) In the traditional game both players end up worse off (sub- optimal outcome) Incentive to cheat, compromise value and minimal rights Each player has preferences among possible outcomes

8 Types of Games - assumptions Number of players: two-players, inclusion of a third party, multiple players Non-cooperative game, no communication, cost of information (perfect information) vs. cooperative games, social interactions Number of repeated iterations (one-shot game, repetition, infinite games) With or without dominant strategy

9 The experiment – description It was inspired by the activity recommended for the explanation of the game theory in the Hall, R. Lieberman M. (2007) Economics. Principles and Applications, 4th Edition, Instructor’s Manual, Cengage Learning. I adopted the payoff table included in the publication (as presented below) I used it in teaching of economics in the real classroom environment to enhance the understanding of various market structures, and implications for the firm The experiment was conducted repetitively in the classroom for last 6 years (2008-2013) during the multiple sections of courses in economics. Each semester it was possible to have one section of the course run with the experiment of the game theory-based classroom game preceded by the ethically-based explanation provided to students of the non-compliance of the individual selection of the strategy.

10 The experiment – how conducted The payoff matrix was showed to students before the play with the explanation of the meaning and the implications of their choices between ‘A’ and ‘B’ respectively, both as in individual outcome and the team result. All students (not only the players) discussed the payoff matrix (comparing to PD’s) recognizing interdependence and the Nash Equilibrium It was played independently by 5 students selected randomly from volunteers Each time it was just one round On the ballots, the students had to write, with the answer ‘A’ (standing for compliance), or ‘B’ (chosen as non-compliance) remained anonymous, only the outcome was pronounced.

11 The experiment - samples Control Sample As above described Controlled experiment As above described PLUS student were instructed that selecting ‘A’ represented the compliance with the group and the motivation to follow was their ethically-based commitment to the group and the group success. Students were also advised that choosing ‘B’ meant non- compliance, cheating the group, and although not individually penalized it was ethically unwelcome.

12 Let’s Play Right Now 5 volunteers Consider the Payoff Matrix Write A or B Fold and return the ballot In a Moment 5 volunteers Consider the Payoff Matrix Write A or B Fold and return the ballot

13 Payoff Matrix used for the classroom game Payment per A Payment per B Total Payments Payment if ALL 5 choose A $ 4.00 - $20.00 Payment if 4 choose A and 1 B $ 1.00 $ 8.00 $ 12.00 Payment if 3 choose A and 2 B $ 0.50 $ 4.00 $ 9.50 Payment if 2 choose A and 3 B $ 0.25 $ 0.50 $ 2.00 Payment if 1 chooses A and 4 B $ 0.10 $ 0.25 $ 1.10 Payment if ALL 5 choose B - $ 0.10 $ 0.50 Source: Hall, R. Lieberman M. (2007) Economics. Principles and Applications, 4th Edition, Instructor’s Manual, Cengage Learning.

14 Ethical considerations: Cheating Self-esteem Expectations Reciprocity Team effort and benefits Common interest Group result Community and society Externalities and public goods Trust and spirit of collaboration Omertà and Vendetta

15 Outcome of the experiment – observations – before Students easily noticed an incentive to cheat (defection from the agreement for the one-time gain) leading to the sub-efficient non-cooperative outcome. Students recognized the similarity to the Prisoners’ Dilemma matrix used to represent the game theory. Even before the vote the discussion evolved into the challenges of ethical behavior. Statistically significantly different outcome in samples payoff.

16 Outcome of the experiment – observations – after Students wanted to improve their outcome right away, although the next round was not afforded. However, we discussed ‘what if’ scenarios leading naturally to the comparison of an oligopoly and a carter. And again legal and ethical issues were raised as an inconvenience. For the hypothetical repeated game students at first, tried to stretch the rules (redefine the ethical standards) and later however, focused on observing others, creating mechanism for cooperation, recognizing the value of information. They had limited interest in the enforcement of the agreement for the optimal cooperative – outcome by penalties or encouragement. The discussion was lead to the business world application of strategic management, competitive versus cooperative strategies (alliances), price and marketing wars, competitive disruption and many other applications of the game theory in business with ethical considerations (corporate culture and corporate code of conduct). The ethically-based motivation introduced in the classroom game had a significant impact on the discussion and the behavior of students.

17 Outcome of the experiment – sample comparison The outcome of the game each time was compared with the experiment run on the controlling sample which was the course section with participants not exposed to the ethically-linked explanation of the individual strategy of the players before the game Statistically significantly different outcome (α=0.01) and higher in samples payoff and in the number-coded answers.

18 Outcome of the experiment – sample comparison T- test: Paired Two Sample for Means, two tail at the 99% confidence level - the Null Hypothesis that samples have the same mean (M) can be rejected (both for payoff and for the number-coded answers)

19 Implications Market structures Oligopoly, cartel, collusion Price wars Corporate strategy Team collaboration Social context and outcomes Corruption, fraud, failure Trusted leadership Business ethics Enforcement Corporate Code of Conduct Civic engagement

20 References Arce, D. G. (2010). Economics, Ethics and The Dilemma in The Prisoner’s Dilemmas. American Economist, 55(1), 49-57. Bereby-Meyer, Y., & Niederle, M. (2005). Fairness in bargaining. Journal of Economic Behavior & Organization, 56(2), 173-186. doi:10.1016/j.jebo.2003.09.013 Campbell, G. M. (2004). Using Game Theory to Introduce Ethics in Decision Sciences. Decision Sciences Journal of Innovative Education, 2(2), 229-234. doi:10.1111/j.1540-4609.2004.00049.x Cappelen, A. W., Hole, A., Sørensen, E. Ø., & Tungodden, B. (2011). The importance of moral reflection and self-reported data in a dictator game with production. Social Choice & Welfare, 36(1), 105-120. doi:10.1007/s00355-010-0468-3 Charness, G., & Rabin, M. (2002). Understanding Social Preferences with Simple Tests. Quarterly Journal of Economics, 117(3), 817-869. doi:10.1162/003355302760193904 Dal Bó, E., & Dal Bó, P. (2014). "Do the right thing:" The effects of moral suasion on cooperation. Journal of Public Economics, 11728-38. doi:10.1016/j.jpubeco.2014.05.002 Dobson, J. (2005). Monkey Business: A Neo-Darwinist Approach to Ethics Codes. Financial Analysts Journal, 61(3), 59-64. Francés-Gómez, P., & del Rio, A. (2008). Stakeholder’s Preference and Rational Compliance: A Comment on Sacconi’s “CSR as a Model for Extended Corporate Governance II: Compliance, Reputation and Reciprocity”. Journal of Business Ethics, 82(1), 59-76. doi:10.1007/s10551-007-9562-6 Francés-Gómez, P. (2003). Some Difficulties in Sacconi's View about Corporate Ethics. Journal of Business Ethics, 42(2), 165-180. Fudenberg, D., & Yamamoto, Y. (2011). Learning from private information in noisy repeated games. Journal of Economic Theory, 146(5), 1733-1769. doi:10.1016/j.jet.2011.03.003 Gibson, K. (2003). Games Students Play: Incorporating the Prisoner's Dilemma in Teaching Business Ethics. Journal of Business Ethics, 48(1), 53-64. James Jr., H. S., & Cohen, J. P. (2004). Does Ethics Training Neutralize the Incentives of the Prisoner's Dilemma? Evidence from a Classroom Experiment. Journal of Business Ethics, 50(1), 53-61. Lacour, P. (2012). Intentions and ethical behavior in trust games. Journal of Socio-Economics, 41(1), 55-63. doi:10.1016/j.socec.2011.10.016 Lanteri, A., Chelini, C., & Rizzello, S. (2008). An Experimental Investigation of Emotions and Reasoning in the Trolley Problem. Journal of Business Ethics, 83(4), 789-804. doi:10.1007/s10551-008-9665-8

21 References – cont. Martin, K., Johnson, J., & French, J. (2011). Institutional pressures and marketing ethics initiatives: the focal role of organizational identity. Journal of the Academy Of Marketing Science, 39(4), 574-591. doi:10.1007/s11747- 010-0246-x Menestrel, M. (2006). A One-Shot Prisoners' Dilemma with Procedural Utility. International Game Theory Review, 8(4), 655-668. Miyagawa, E., Miyahara, Y., & Sekiguchi, T. (2008). The folk theorem for repeated games with observation costs. Journal of Economic Theory, 139(1), 192-221. doi:10.1016/j.jet.2007.04.001 Pekeč, A. (2001). Meaningful and meaningless solutions for cooperative n-person games. European Journal of Operational Research, 133(3), 608-623. Ploner, M., & Regner, T. (2013). Self-image and moral balancing: An experimental analysis. Journal of Economic Behavior & Organization, 93374-383. doi:10.1016/j.jebo.2013.03.030 Rocha, H., & Miles, R. (2009). A Model of Collaborative Entrepreneurship for a More Humanistic Management. Journal of Business Ethics, 88(3), 445-462. doi:10.1007/s10551-009-0127-8 Sacconi, L. (2006). A Social Contract Account for CSR as an Extended Model of Corporate Governance (I): Rational Bargaining and Justification. Journal of Business Ethics, 68(3), 259-281. doi:10.1007/s10551-006-9014- 8 Timmer, J. (2006). The Compromise Value for Cooperative Games with Random Payoffs. Mathematical Methods of Operations Research, 64(1), 95-106. doi:10.1007/s00186-006-0072-6 Tullberg, J. (2009). Moral Compliance and the Concealed Charm of Prudence. Journal of Business Ethics, 89(4), 599-612. doi:10.1007/s10551-008-0020-x Weitzel, U., Urbig, D., Desai, S., Sanders, M., & Acs, Z. (2010). The good, the bad, and the talented: Entrepreneurial talent and selfish behavior. Journal of Economic Behavior & Organization, 76(1), 64-81. doi:10.1016/j.jebo.2010.02.013 White, M. D. (2009). Kantian Ethics and the Prisoners' Dilemma. Eastern Economic Journal, 35(2), 137-143. doi:10.1057/eej.2008.20

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