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Game Theory As A Model For Business And Business Ethics

Published online by Cambridge University Press:  23 January 2015

Robert C. Solomon
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Abstract:

Fifty years ago, two Princeton professors established game theory as an important new branch of applied mathematics. Game theory has become a celebrated discipline in its own right, and it now plays a prestigious role in many disciplines, including ethics, due in particular to the neo-Hobbesian thinking of David Gauthier and others. Now it is perched at the edge of business ethics. I believe that it is dangerous and demeaning. It makes us look the wrong way at business, reinforcing a destructive obsession with measurable outcomes and a false sense of competition. It falsely characterizes or insidiously advocates a style of human behavior that is utterly unacceptable. To put the matter quite crudely, a person who actually practiced the form of “rationality” advocated by game theory would be something of a monster.

We should not ask for more precision than a subject is capable of giving us. — Aristotle, (384–322 B.C.E.) Nicomachean Ethics Bk. 1

Not that you won or lost—but how you played the game. — Grantland Rice (1880–1954) “Alumnus Football”

Type
Articles
Information
Business Ethics Quarterly , Volume 9 , Issue 1 , January 1999 , pp. 11 - 29
Copyright
Copyright © Society for Business Ethics 1999

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References

Notes

* Some of this article is based on my discussion of game theory in business in Ethics and Excellence (Oxford, 1991), which has been adapted with the permission of the publisher. Special thanks to Mark Murphy, Ken Riley, Peter Danielson, Christopher Morris, Peter Vanderschraaf and Patricia Werhane. All remaining mistakes, of course, remain my own.

1 Albert Z. Carr, “Is Business Bluffing Ethical?” Harvard Business Review, January-February, 1968. Some of these responses were published in the Harvard Business Review, May-June, 1968.

2 David Gauthier, Morals by Agreement (Oxford, 1986).

3 ”Refinement,” like many more ordinary concepts, has taken on a technical meaning in game theory. I am referring to the ordinary idea of “improved and sophisticated” (as opposed to “crude and undeveloped”) here.

4 Not coincidentally, in tests of common decency (for example, the routine exercise of leaving an appropriate tip for a waitperson), economists as a group tend to do embarrassingly badly. Robert Frank, “Why Economists Make Bad Citizens” and (wth T. Gilovich and D. Regan) “Does Studying Economics Inhibit Cooperation?” Journal of Economic Perspectives 7, no. 2 (Spring 1993): 159-171.

5 See my “Existentialism, Emotions, and the Cultural Limits of Rationality,” Philosophy East and West 42, no. 4 (October 1992): 597-622.

6 Bernard Suits, The Grasshopper (Toronto: University of Toronto Press, 1978).

7 See, e.g. LaRue Tone Hosmer, “5 Years, 20 Issues, 141 Articles, and What?” Business Ethics Quarterly 6, no. 3 (July 1996): 325358.

8 John von Neumann and Oscar Morgenstern, Theory of Games and Economic Behavior, 1944. Morgenstern was an economist. They did not invent game theory, however, as is usually supposed. Peter Vanderschraaf has argued, for example, that David Hume developed an informal version of game theory in his Treatise of Human Nature, part III. (This volume.)

9 One might think of all of these as variants of cost-benefit analysis, within overlapping but different domains. Game theory could be conceived as a particular variant or, more forcefully, the formal discipline that undergirds all of them. But even broadly considered as the form of strategic interactive cost-benefit analysis, there are some serious questions of the kind I want to raise. See, e.g., David Copp, “Morality, Reason, and Management Science: The Rationale of Cost-Benefit Analysis,” Social Philosophy and Policy 2 no. 2 (Spring 1985): 128-151.

10 David Gauthier, Morals by Agreement, Chapter IV.

11 I have argued this thesis at some length in my book, Ethics and Excellence (originally subtitled, “An Aristotelean Approach to Business,” which is also the title of an article in BEQ, 1994).

12 Hobbes, Leviathan, discussed as distortions of the perfect market by Gauthier, Chapter IV, p. 85. But in their uncompromising defense of free enterprise, economists and game theorists in business rarely include such qualifications.

13 For an excellent account of the entrepreneur as one who transcends normal practices and expectations, see F. Flores, H. Dreyfus, C. Spinosa, Disclosing New Worlds (Cambridge: MIT Press, 1997).

14 ”George” on Seinfeld comes to mind, but a good deal of American comedy is based on just such absurd articulation of supposed self-interested strategies underlying normal behavior.

15 Cf. Gauthier, Morals by Agreement, Chapter IV, in which he moves too far toward the other side and argues that the market “is the very antithesis of the Prisoner’s Dilemma” (p. 83).

16 Notably, by Robert Axelrod in his book, The Evolution of Cooperation (New York: Basic Books, 1984). The best strategy in a series of repeated game situations (that is, most business relationships) turns out to be: return trust and cooperation with trust and cooperation, breaches of trust and betrayal with breach of trust and betrayal as punishment, or “tit-for-tat.” What one might do in a single encounter is rendered irrelevant (or irrational) in the light of future encounters and expected retaliation. It is a result with obvious practical implications and enormous theoretical promise (e.g., in the evolution of punishment and revenge as well as cooperation), but the basic assumptions of the problem—utility maximization and the non-cooperative stance—pertain to such sophisticated models as well as the more vulgar models, even when their conclusion is (qualified) cooperation. More recently, see Steven J. Brams, The Theory of Moves (Cambridge University Press, 1994), who discusses the strategy of “dynamic” games in which there are several or many moves, more or less independent of one another, a sophisticated next step beyond merely reiterated games and therefore a better model for business relationships, which are not repetitions of one and the same transaction.

17 Derek Parfit, Reasons and Persons (Oxford University Press, 1984).

18 Ethics and Excellence, (Oxford University Press, 1991).

19 Here I have benefited from T. C. Schelling, The Strategy of Conflict (Cambridge, 1960); Edward F. McClennen, “Morality as a Public Good,” a manuscript read at the Society for Business Ethics meeting in Washington, D.C., December 1988, and Bernard Suits’s delightful Grasshopper (Toronto, 1978).

20 Rescher, Nicholas, Unselfishness (University of Pittsburgh, 1975), pp. 38-39.

21 ”Escape from Paradox,” Scientific American 2\1 (1967): 51.

22 Rescher, p. 35.

23 Ibid.

24 John Rawls, A Theory of Justice (Harvard University Press, 1971), p. 144.

25 This, I take it, is what Nietzsche means by “what is done out of love is always beyond good and evil” (Beyond Good and Evil, § 153), a phrase that does not have to be interpreted in the usual “immoralist” boot-in-the-face manner. Friedrich Nietzsche, Beyond Good and Evil, trans. Walter Kaufmann (New York: Random House, 1966), p. 90.

26 Rawls, p. 142.

27 See, for example, Edwin Hartman, Organizational Ethics and the Good Life (Oxford University Press, 1996).

28 John Harsanyi, (rf). I am indebted to David Sherman, unpublished.

29 Moritz Schlick, Problems of Ethics, trans. D. Rynin (New York: Dover, 1939), pp. 202-203.

30 Edward McClennen, “Foundational Explorations for a Normative Theory of Political Economy,” in Rationality and Dynamic Choice: Foundational Explorations (Cambridge: Cambridge University Press, 1990).

31 For an excellent discussion of this non-goal-oriented concept of teleology in Aristotle, see Michael Stocker in Amelie Rorty, ed., Essays on Aristotle (University of California Press, 1980).

32 Ludwig Wittgenstein, Philosophical Investigations. See also Suits, The Grasshopper.

33 Mark Murphy, in correspondence, November 1996.

34 Jon Elster, in many books, including Solomonic Judgments, Ulysses and the Sirens: Studies in Rationality and Irrationality, and Rational Choice, brilliantly demonstrates the ways in which rationality breaks down. Nevertheless, he refuses to draw what would seem to be the obvious conclusion.