“The Train Wreck That Is Strategy” and Game Theory
| Nicolai Foss |
In a comment on my co-blogger’s post of yesterday, a commentator argues that there is no real alternative to formalism, and then provokingly continues:
If you need any demonstration of the need for formalism in theory-building within the social sciences, take a look at the train wreck that is Strategy. As we are discovering using formal methods, most of what passes for foundational theory in strategy is wrong.
Unfortunately, he doesn’t explain what exactly he means by “foundational theory in strategy” and why it is “wrong.”
I think that formalization is definitely an important goal of social science research and is worth striving for (See Patrick Suppes’ very convincing argument on the “desirability of formalization in science”). Formalization certainly also makes life easier in a number of ways. For example, in my teaching I have found it literally impossible to convey what agency theory is fundamentally about without using game theory.
However, what may be at issue is exactly how important it is and, in connection to this, whether the practice of building formal theory per se should occupy the highest position in the reputational hieararchy of economics.
With regard to the last point, it is debatable how much of real economic substance new growth theory has added to growth theory relative to earlier theorists (see this paper). It is also similarly debatable how much game theoretical IO has really added relative to the earlier informal observations of Bain, Mason, Sylos-Labini and others. Yes, in some ways Oliver Hart does go beyond Oliver Williamson (and in other ways much is missing in Oliver H relative to Oliver W), but the fundamental intuition is still Williamson’s. The point is that it is questionable whether formalization is really an engine of discovery of new insights. Which brings us to the “train wreck that is strategy.”
Economists (e.g., George Stigler) have sometimes argued that market for ideas are efficient. Surely, this cannot apply to all markets for ideas, because then the persistence of sociology would cause a too large anomaly. However, one certainly would expect game theory ideas to be prevalent on markets for ideas on strategy because of their apparent relevance. They are not.
In 2004, I participated in a very interesting pre-conference workshop at the Strategic Management Society Conference in St. Juan, Puerto Rico. The subject was the use of game theory in strategy research and among the panelists were Adam Brandenburger. Adam explained — somewhat to my surprise — that there are really little more than a dozen serious, game theory-based strategic management papers around in the major business administration journals. In a later session at the conference itself, Pankaj Ghemawat mentioned a similar number.
It apparently turns out that not only strategy scholars but also real world strategists do not take much of an interest in game theory. The people at FastCompany “assembled a panel of 30 respected game theorists around the world, and we sent them a survey asking, “Can you think of any examples of real, live companies that have consciously applied game-theoretical concepts to a real business problem?” The response was . . . a deafening chorus of head scratching.”