Choosing in conditions of uncertainty
A range of possibilities
Translating the poker playing strategy into a business scenario, it can be described as making many small investments in risky situations, waiting for one of them to show promise (become relatively risk free) and then going for broke. Sometimes I went broke, but, over the long term this strategy enabled me to create some outstanding successes - sufficient to ensure that overall the strategy was a lot better than pursuing a regular career.
In poker, this principle of staying in hands to wait for a favourable break is known as "open play". It allows a player to make big wins when the breaks come. In business, this strategy is used to "get into the game". By being in a business, even when it is not profitable, it is more likely to encounter a profitable situation when it comes along than by waiting safely on the sidelines.
The cost of spreading risk in a start up situation is illustrated in this fictional scene, where a man is visiting a friend who is trying to start up a new business after a recent business failure:
I see you are back in business again?
Not yet, all I have is this office. I have yet to decide what business to go into.
Have you got any ideas?
Yes, I have made a short list of possible business ventures to go into.
So you have to decide which on this short list to go for?
No, I shall probably have a go at them all.
All at once?
Yes. Why not? They all seem quite good ideas and I see no reason to pick any particular one.
But wouldn't it be more efficient to go for just one of them.
Certainly, if I knew which of them would be successful.
But you said they were all good ideas.
Yes, but I know from experience that even good ideas have no better than one chance in six of getting off the ground.
So how many ideas have you got on your list?
So trying out all six will make it certain that at least one of them will get off the ground?
No. The odds of succeeding are improved , but, success is not certain.
What are your chances of getting one of them off the ground then?
Each idea has five chances in six of being unsuccessful so the probability of all six being unsuccessful is (he then draws and makes a few calculations on a sheet of paper)"
About one chance in three of all six ideas having to be aborted.
So I would say that there are two chances in three, of one of these ideas getting off the ground.
What are you going to do if none of the ideas work out?
Put together another list of six.
Again with two chances in three of succeeding with one of them?
That's right and the chances of failing with two lots of six is one third multiplied by one third.
Giving you a nearly a ninety percent chance of getting something off of the ground?
Yes, So there seems to be a reasonable cause for hope.
In this scenario, the businessman has assigned a value for dividing up his risk. From his past experience of business startups, he has observed that when he has a good business idea it only seems to come to fruition about one time in six. He therefore allocates about thirteen percent of his resources to each project.
If his resources were in terms of a fixed amount of investment capital, then it would be a simple case of spreading the investment risk across a number of risky situations. However, if he is starting from a square one position, with little or no capital, the resources would be in the form of a continuous but limited amount of time he could allocate.
In these terms the businessman could choose to allocate roughly thirteen percent of his available time to each of the six projects. This is similar to the poker player allocating small bets to hands that he is not very sure of winning. However, it is unlikely that the probabilities of success of each project would remain constant. Just like the hands the poker player plays in, they can each develop differently. It is most likely that work on some projects would reveal hidden flaws that would cause them to become less viable and there would be others where situations would emerge to manifest higher probability of success.
With the various projects beginning to prove more or less likely to succeed, it would be obvious that the businessman would reallocate his time accordingly. Most likely, at some stage one of the projects would emerge as being highly likely to succeed and then the businessman might then feel it expedient to drop all the other projects to concentrate on the single one. In a game of poker, when a poker player feels confident that his hand can beat all the others he will be inclined to bet to the limit of the total money he has available - known in poker circle as, "Going all in". Of course, there is no certainty that this final choice will win, but, as with the poker player, there is always another day.
It is also worth noting that at the beginning of the chapter, Mark Baarste, had described decision theory as selecting from a list of likely possibilities. With that technique, probability is used to choose between them, i. e., make the best choice. The Game Theory technique is to say there is insufficient information to be able to make a choice, so, all options must be treated as equally likely to succeed. This being the case, all possibilities are tried together without making a choice of any particular one. Unpredictable, emergent events are left to determine which of the possibilities ends up as the final choice.
Because e-Business involves so many unknowns and uncertainties, this provides us with an important fundamental rule to use in e-business strategies: never make rational choices between alternative options; always make sure that a variety of options are being tried out at the same time, letting the developing situations determine the final choice.