A worst-case scenario is a concept in risk management wherein a decision-maker, in planning for potential disasters, considers the most severe possible outcome that can reasonably be projected to occur in a given situation. In life, we are constantly placed in situations where we must make decisions, and some of these conditions may lead to worst-case scenarios.
How can we prevent this from happening? The solution to this dilemma is called Harrison’s Applied Game Theory (HAGT). HAGT is based on the multiple Nobel-Prizing ideas of game theory. In game theory, a person or group uses rational thinking to make a decision that will benefit them, or enable them to win”. This win happens irrespective of what other variables are in place, or what other people in the same scenario may do.
I created HAGT in 2003 because it was clear to me, as a magician, hypnotist, and stage mentalist, that most humans do not act rationally. Rather they present irrational ideas and biases to others in ways that make these ideas seem rational, though they are not rational at all.
A game theory strategist is also a futurist. They know not only short-term strategies but also the long game. To win, it is essential that they use effective, efficient, and precise, long game tactics. In order for us to achieve these same results, we need to see the consequences that will result from any particular applied strategy. If this is not done we might end up with negative unforeseen consequences, known in HAGT and as “perverse incentives”.
Let’s explore perverse incentives in greater detail and as it is understood through the lens of gamer thinking, and gamer psychology. Stated simply a perverse incentive is an incentive that has an unintended and undesirable result. In other words, the results are contrary to the intentions of the strategist or decision-maker. Here are a few examples of noted perverse incentives.
· In Hanoi, under French colonial rule, a program paying people a bounty for each rat tail handed in was intended to exterminate rats. Instead, it led to the farming of rats.
· Paying medical professionals and reimbursing insured patients for treatment but not prevention encourages medical conditions to be ignored until treatment is required. Also, paying only for treatment effectively discourages prevention (which would reduce the demand for future treatments and would also improve the quality of life for the patient). Payment for treatment also generates a perverse incentive for unnecessary treatments which could be harmful, for example in the form of side effects of drugs and surgery. These side effects themselves can then trigger the demand for further treatments.
· Though I am in favor of it, there is no doubt that The Endangered Species Act in the US imposes development restrictions on landowners who find endangered species on their property. While this policy is well-intentioned and has some positive effects for wildlife, it also encourages preemptive habitat destruction (draining swamps or cutting down trees that might host valuable species) by landowners who fear losing the use of their land because of the presence of an endangered species. In some cases, endangered species may even be deliberately killed to avoid discovery. Similarly, if the fine or other penalties for committing environmental damage is perceived as less burdensome than the cost of preventing the damage in the first place, an individual or company may not place safeguards in place and simply pay the penalty if the damage occurs.
So how can we transcend perverse incentives, or avoid getting snared in that unpleasant game?
There are a number of factors that can lead to these negative unintended consequences and worse-case scenarios.
1. Defective incentives — These are benefits that though well-intentioned do not serve that purpose.
2. Offering individual types of benefits that might cause them to intentionally reduce their performance. In such a scenario they might continue to receive those benefits even though they offer lower quality performance.
3. Unbalanced or distorted compensation metrics: This is a scenario where a flawed system of measuring the benefits offered to a person or group is not balanced against the revenue, profits, or other benefits the person or group receiving the incentive produces.
Often when we make a decision, we may need to expend a resource such as time, space, information, or money to complete the process successfully. The ability to replenish these resources generally reflects the wisdom of that decision. Many a game theory strategist has won many a battle but lost the war because of the loss of resources.
However, if a decision-maker focuses exclusively on resources two problems may arise:
1. Maintaining or increasing moderate resources while competing may cause a decision-maker to ineffectively focus on over-investment of time and energy in growing more resources. This can lead to a winning strategy that produces weak or deteriorating returns.
2. If a game theory strategist or decision-maker focuses on maintaining or enhancing already high levels of stored and accessible resources, they may be encouraged to hold back on taking strategic action out of fear that doing so may dilute those resources.
This resource problem happened often in the record industry in the 1950 -1980s. A small company might suddenly have an unexpected hit record and yet went out of business. This perverse incentive occurred because the record company did not have the money to produce the record for sale to the millions of buyers who wanted it.
Obviously, incentives, even those based on metrics, and probability statistics have potential downsides that can undermine success.
Experts on perverse incentives tend to recommend that any skilled game theory strategist needs to focus on the long rather than the short game. This is because a skilled strategist can manage each metric. They also can choose which metrics to leverage. This of course will be done at the expense of the rest. This takes place when it becomes obvious that some metrics will be productive and others will not. If you enjoyed this article I thank you for any…
Author: My name is Lewis Harrison. I am a practical philosopher and independent scholar in the area of gamer psychology, personal improvement, and problem-solving.
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About the Author: Lewis Harrison, is a speaker a strategist specializing in Applied Game Theory Strategies and Personal Improvement
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