President Obama & his Nobel Prize – A preemptive move!

Few hours back, President Obama accepted the Nobel Peace Prize in Oslo, Norway & gave an excellent acceptance speech!! (http://www.whitehouse.gov/the-press-office/remarks-president-acceptance-nobel-peace-prize)

Unfortunately, Pres.Obama’s selection for Nobel peace created a huge controversy (In fact, he acknowledged and addressed that in his acceptance speech). I think, critics have a valid point there. The deadline for nominations for the Nobel peace prize was Feb. 1st – just 12 days after Mr. Obama was inaugurated. Now with all due respect, Pres. Obama, no matter how great he is, could n’t have achieved that much to win a Nobel in less than 2 weeks. I highly doubt if anyone can actually come forward to even defend this logic.

Then, why did the Nobel committee choose him for peace award knowing this could get them into such a controversy. What were they expecting?

There are many viewpoints & versions of logic about what could be the real reason behind Obama’s Nobel. Here are my 2 cents –

I think, Nobel committee is trying for a “preemptive” peace. In general we expect a president/person to first work on help bringing peace & promoting democracy on regional or global level, or champion climate or environmental causes and after years of such work, Nobel committee may consider his/her nomination for Peace award. In which case. the over simplified game tree has to look like below: Pay-offs are intentionally omitted in an attempt to not hurt anyone’s feelings. (click on the image below for better resolution)

But this year, the Nobel Committee has turned that logic around! I think they just played a strategic move (commitment) – by just declaring the Nobel peace upfront to Obama, the Nobel committee is trying to influence the path that Obama is going to take in the future (see the modified tree below). It would be obviously embarrassing for a president with a Nobel peace prize in his pocket to start a new war or intensify a war or not signing a climate protection treaty or something like that. You got an idea. (click on the image below for better resolution)

I could not resist sharing someone's comment on the TV in this regard - Perhaps next year, they'll start giving Oscars to the people who have best chances of making the best movies next year!!

Let me end this post with a Nobel peace prize tidbit - Example of nominees who didn't win the Nobel peace prize includes Adolf Hitler, whose name was put forward in 1939!! (Can you imagine someone nominating Hitler for a noble peace!!!!?)

DARPA Networking challenge & how MIT team cracked it?

How many of you followed the DARPA’s (Defense Advanced Research Projects Agency) network challenge that happened less than a week back? Yeah, the red balloons contest!!

For those of you have not heard, see this - https://networkchallenge.darpa.mil/default.aspx

Here below is the official challenge description – But to sum it up in 2 sentences - they'll fly ten red 8-foot diameter moored weather balloons in various locations in US; the first person to register the locations of all ten will win $40,000. (Click on the image below for better resolution)

Now, it's obviously a problem in game theory, behavioral economics, and group collaboration. Contestants will register as individuals, not as organizations – and of course, people will collude and collaborate, but they'll have to determine not only mechanisms for taking in, validating, filtering, and crediting distributed reports (basic crowd-sourcing problems), but they'll also have to figure out the basis for distributing the prize.

It is interesting to note how MIT Red Balloon Challenge team won this competition this year (on Dec5th, 2009) in just hours after it started!! (The maximum allowed time was 9 days).

Team MIT took help from lot of people (strangers) across the nation in locating all the 10 balloons in such a record time through a viral campaign. But, how did they convince so many strangers to collude with them when the end result could be a cash prize?

Team MIT's strategy was to build a Web site designed to attract more and more followers--people who might know the balloons' locations themselves and those could bring aboard others who knew the coordinates, essentially creating a chain effect.

The secret of success is in the payoff structure they came up with. That encouraged people to enthusiastically enroll as MIT’s colluders (is that even a word?) and also encouraged them refer many their friends & so on. Check how the payoffs are structured in below:

Source: http://balloon.mit.edu/mit/payoff/

Take away from this experiment and results? In the own words of Riley Crane, MIT Red balloon challenge team’s lead:

“And if I could add, from our point of view, what the message of this was. I think it's important to point out that there's a tremendous scientific opportunity in all of this, and from our side, we were never in it for the 10 balloons. Of course, that was the challenge, and that was exciting. But from a broader scientific perspective, we were in it to understand how to mobilize the vast resources of the human network, to face challenges and explore opportunities in living in such a connected society. And as a footnote to that, I think some of the applications that might come out of this would be: Can we use this technology we've developed to find missing children or something along those lines where there's an incentive for people to really participate and help out? Often, the police will offer a reward for finding a missing child. Can we restructure that in a way that we tap the vast resources of this network? Again,

maybe you don't live in the state where a child was abducted, but maybe you know someone who does. Or during an emergency, maybe we need to find 10 people in a region who can operate heavy machinery, maybe a building collapsed. And how can we use these new tools to solve those challenges to help society? That's kind of the broader message that comes out of this from our side.”

Winner’s Curse – Better lose in a B-school biz plan contest!!

I have great respect for Vivek wadhwa of Harvard/Duke. Some of his papers/articles about globalization & immigration are eye openers for many. I follow him on twitter. One of his recent articles talks about why losing a B-school biz plan competition is actually better than winning?

You can read the complete article here à http://www.techcrunch.com/2009/11/28/winners-curse-why-losing-a-b-school-biz-plan-competition-may-be-good-for-your-startup/

Vivek talks about how one of his students who lost in a biz plan contest (Duke’s Elevator Pitch challenge) & why he thinks that is actually good! The point he raises in this context is something very familiar with us in our everyday lives. I absolutely agree with the research findings that Vivek quoted below. (click on the image, if the resolution is not clear)

When I look around, I could think of several examples (especially in entertainment & sports) that fit perfectly with the above research findings. As a kid, I was a big fan of Indian cricket team and used to closely follow the careers of many “budding” cricketers. If someone plays well in a season in the state level tournaments, media creates a big hype and as a result, this “kid” becomes a star overnight with lot of endorsements & fan following. And that “fame” changes everything. In most cases I have seen, these “kids” fall into this hype “trap” and think they achieved the peaks already. Very few of them could actually sense the reality & focus on the career to make it to the national team. I am sure this can be applied to NBA/NFL too!!

So, winning in every competition/race is not necessarily good! Some “wins” come with curses attached & we need to know how to handle those!!

Fair Division – A Mathematical folktale from India

This particular blog entry is somewhat special to me. None of this post’s content is my creation. This is about one of the mathematical puzzles I struggled to solve as a kid. It’s about fair division & how various players perceive the value of their contribution. And how the pie is actually divided by an expert. Read on!

Here is the actual puzzle (Names are Americanized to make your life easier):

One very hot day two people Joe & Sam were getting ready to eat their lunch. Joe had 3 pieces of flatbread & Sam had 5 pieces flatbread. As they were about to begin their meal, a young nobleman came by.The nobleman looked hungry and tired, so Joe and Sam invited him to eat with them.

After some discussion about how to divide the food, they decided to stack all the 8 flatbreads (Joe’s 3 + Sam’s 5) on top of each other and then cut the stack into 3 equal parts. So did they divide and all three of them had a great meal. The nobleman happily paid 8 gold coins as a token of gratitude & left!

Now Joe & Sam were arguing about how to divide the pie (8 gold coins). Joe thinks they should get 4 gold coins each. Sam thinks he should get 5 out of 8 coins as he contributed 5 flatbreads compared to Joe’s 3. Finally they decided to go to a judge.

The Judge thought for a while and said “The fair way to divide these gold coins is to give seven coins to Sam and one coin to Joe."

What!!?? Exclaimed both Joe & Sam. Then, the judge explained how his division is FAIR & both the players left convinced.

This is was the puzzle. Now, can YOU tell why judge ruled the way he did? What is his logic behind giving 7 gold coins for Sam (who contributed 5 flatbreads)&(1 gold coin to Joe who contributed 3 flatbreads)?? Solve it if you can!!

SPOILER ALERT: Here is the solution:

As Joe’s contribution towards guest is only 1/8^th& Sam’s contribution is 7/8^th – the Judge ordered Joe to have only 1 gold coin & give 7 coins to Sam!! Fair division. huhh!

NOTE: If you want to read the classic Indian version of this tale/puzzle here it is (no solution given though!): http://www.edb.utexas.edu/empson/wp-content/fairsharefolktale2.jpg

Psychoauction.com– how do “giveaway” auctions work?

Thanks to a colleague of mine, I came to know about this new auctioning website - Psychoauction.com. At the first glance, I understood why my colleague got so excited about it. I could see an iPhone 3GS won by someone for a mere $5.56 and a Sony Vaio laptop was won for $ 26.13. These are just few examples and there are many other electronics won by bidders for a fraction of the actual price. You can check the following URL

http://www.psychoauction.com/mainmini.php?page=historic

Is this website a sham? If not, how can this kind of business model survive? Apparently, the founders are, in fact, making lots of money from this.

Here is how – Psychoauction.com is based on pay-to-bid auction format. That means, every time a bidder increases the auction price (or start bidding) they would be charged a fee. So, bidding fees are the primary sources of revenue for the seller! (Not the margins from the actual item they sell).

In case of Psychoauction.com, the membership is free (though premium accounts are charged) & sign-up gets you 2 bids for free. Thereafter you will have to buy bids (each bid costs you $1). Items generally start at a very low price & once a bidder bids on it, there will be a window of 3 minutes for others to submit a competitive bid (you don’t specify the offer amount, but you just express interest by using one of the bid points you have. i.e., spend a $1). If someone bids in that 3 min window, the item price goes up by $0.01 (yes, 1 Penny!!) and the 3 minute clock resets again. It goes on until no one else bids & the last bidder gets the item.

If you see the economics of this whole process, it makes perfect sense for the website owners (of course, the membership volume crosses a critical volume for this to work). For example, there is this Laptop worth $1000 put on the auction at a base price of $10. The fractional price point attracts many users (though they may not even need a laptop). Everyone tries their luck by spending their bid points (which they purchased for a $1/bid point) and in the end, one user (the lucky one) wins it for say, $25 (That means there were 1500 users that bid on this item, as each bid rises the price by $0.01). So the owners of the website, actually made $1500 (through bid points) and then “gave away” a laptop worth $1000 for a mere $25 for one of the users. That’s a $425 profit right there ($1500+$25-$1000)!!

No wonder, PsychoAuction.com is started by an ex-investment banker! :)

Cumulative Voting system – How does it protect Minority interests?

Have you read the recent news about a not-so-common election system (Cumulative voting) introduced in a village of NY? If not, read the details here -

http://news.yahoo.com/s/ap/20091106/ap_on_re_us/us_voting_rights_lawsuit

When I first read this news, the question I had was - What is cumulative voting and how does it really help minorities (Hispanics in this news article)? So, decided to examine the “cumulative voting” system more closely and see why is it specifically preferred for minorities (Be it in social situations or in corporate world).

I will take a corporate business scenario and demonstrate how cumulative voting is preferred to protect minority shareholders’ interests.

Assume, Alice owns 105 shares and Brett owns the other 300 shares of a company - SDA Inc., And SDA Inc’s articles of incorporation stipulate straight voting for the election of three (3) director positions it has on its board. Every share holder gets 1 vote per share per each director position. So, Alice will get 105 votes each for every director position and Brett gets 300 votes each for every director position.

There are 6 people (A, B, C, X, Y & Z) contesting for those 3 open director positions (so the top 3 candidates with the highest votes will be elected).

Alice’s preferred candidates: A,B & C

Brett’s preferred candidates: X,Y & Z

Now, If SDA Inc’s articles of incorporation stipulate straight voting for the election of directors, the result looks as below:

NOTE: Under straight voting, candidates have a cap for maximum number of votes they can cast for each director position. (i.e., Alice cannot vote more than 105 to any one contestant. Same way, Brett can’t cross 300 votes to one contestant).

Result? As you can see from the above table, all three of the candidates preferred by Brett got in the top 3 spots & hence won the three director positions. What do you think of this result? Well, in one way, this may look very “fair” for because Brett has the majority of share in the company.But, when we think from Alice’s perspective – she (“the minority”) in this case, does NOT have any representation on the company’s board! (All her preferred people A, B&C lost the election). That most likely leaves Alice with a feeling of being neglected in all the future decisions being taken by the company’s board and most importantly, she may not have an option to voice her concerns, no matter how critical those are. This scenario would have even much serious implications when applied in the social context (a section of the society being neglected & not being part of the decision making – Just as explained in the above referred news article).

Cumulative voting system helps us resolve this issue. Under Cumulative voting system, a person can cast all his/her cumulative votes to one person (NO “one vote per director position” restriction). Let’s go back to our prior example & see how the result would change if SDA Inc’s articles of incorporation stipulate Cumulative voting for the election of three (3) director positions

As you can see, now Alice has a choice of casting all her cumulative votes (3 * 105 = 315) to just one candidate and make sure at least of her preferred people get elected into the board. In this scenario, no matter how Brett splits & combines his votes, he can’t get more than 2 director positions for his preferred candidates.

That explains why the federal judge in the previous news article imposed the cumulative voting system to make sure there is Hispanic representation for the village – Port Chester.

Strategic moves between Microsoft & Google

Have you heard of a strategy called “Besiege Wei to Rescue Zhao”? This ancient Chinese strategy is dated back to 354B.C and all it says is something very simple but extremely significant – “When the enemy is too strong to attack directly, then attack something he holds dear”. You can read more about this strategy at this URL: http://www.chinastrategies.com/List.htm (Strategy # 2 in the link).

Is n’t this exactly what has been going on between Microsoft & Google for the last few years? Let me elaborate – You must have been familiar with Google Docs (the web-based word processing and spreadsheet software that is attempting to compete directly with Microsoft Office). What can be the intention behind coming up with such a product? Is it purely for financial incentive? There are hardly any corporate customers using google docs for their business needs. Here is what an industry expert thinks

Sridhar Vembu, CEO of AdventNet, which runs the Web-based application suite Zoho, has calculated his competitors' revenue per employee and profit per employee and has come to a startling conclusion: "We simply don't believe Google has the rational business incentive to go deep into the business/IT software category." According to his study, Google makes more profit per employee ($214,000) than enterprise software giant SAP makes in revenue per employee ($199,000).

So what's Google up to? "It is in it to put Microsoft on the defensive on its home turf, so that Microsoft's offensive capability on the Internet is diminished," Vembu says.

In other words, Google is not attacking Microsoft Office because doing so would increase Google’s profitability, but rather it is doing so to damage Microsoft’s focus and capability to attack the businesses Google really cares about. It is Google’s strategic move (Threat) to deter Microsoft from making further advance into its core “search” business.

Microsoft responded back with their own strategic move – by announcing BING, a direct competition to Google’s search engine. Google, in turn, responded back with another strategic move, Chrome Operating System (OS), a direct competition to Windows. This game is expected to continue for a while with a series of such strategic moves.

Amazon Vs Wal-Mart - Negative Sum games!

Are you following the ongoing price war (started with books, spread into DVDs & now into game consoles etc.,) between Amazon & Wal-mart? Who do you think would the winner be? Ok, before even getting to that question, let’s analyze this situation from the game theory perspective.

It all started, when Wal-Mart decided to mark down the prices of ten best-seller books to ten bucks. When Amazon, predictably, matched that price, Wal-Mart went to $9, and, when Amazon matched again, Wal-Mart went to $8.99, at which point Amazon stopped responding, but another major retailer Target matched the Wal-mart’s price leading Wal-Mart to drop the prices further down to $8.98. For now, price war in books apparently stopped at that point, but spread into other products like DVDs & Game consoles.

Now, let’s take a look at the cost structure of the book industry and analyze the impact of this price war. Book prices are traditionally around fifty per cent off the cover price, and these books are now marked down sixty per cent or more, Amazon and Wal-Mart are surely losing money every time they sell one of the discounted titles. So, the more they sell of these titles, the less they are making. (Does n’t that remind you of the Viesta case results, where the busiest person with lot of jobs in hand actually loses money?).

Given this fact, why do companies engage themselves into price wars, in the first place? The hope is that if you cut prices enough you can increase your market share, and even your profits. But this works only if your competitors won’t, or can’t, follow suit. More likely, they’ll cut prices, too, and you’ll end up selling the same share, only at a lower price.

From a game-theory perspective, price wars are usually negative-sum games: everyone loses (Of course, when companies lose, customers win!). A recent study found that, if competitors do match price cuts, industry profits can get cut almost in half. The best way to win a price war, then, is not to play in the first place. Instead, companies should actually focus on their competitive advantage (customer service, quality, coolness etc.,). Companies can also “signal” competitors that they are actually for “stable pricing”, and not interested in starting a price war. The idea is to let your competitors know that you’re not eager to slash prices—but that, if a price war does start, you’ll fight to the bitter end.

If with a little common sense and basic economics, we can demonstrate that Amazon Vs Wal-mart price war is such a bad step, why did not Wal-Mart’s strategists stop it from initiating the price war? And why did not Amazon resist from getting itself into this war? Were they just reckless? Or did this turn into an “ego” issue?

NO, apparently not!! By starting this price war, Wal-Mart is actually making a statement that it’s a player in the online world. From Wal-mart’s point of view, the real goal of this conflict isn’t to lure readers away from Amazon, and it isn’t to get people to buy one of “those ten books”. It’s to lure them online ( to their walmart.com), away from big booksellers and other retailers, and then sell them other stuff. Usually, price wars wreak havoc because they erode the pricing power of an entire business. But, because this price war involves just ten items (that too low priced books), its impact on revenue will be small, and outweighed by the positive effects of all the publicity. Hence this price war may not hurt both Amazon & Wal-mart as bad as it looks on the surface, as it potentially gets them more revenue in other areas and also gives ample publicity!! However, the remaining small players in the book industry are going to be the real losers!! (Squeezed between the behemoths).

Prohibition of Insider Trading – Fair? Really?

You may have been following the recent Insider Trading scandal(s) & the ongoing debates about whether it’s time to legalize the Insider trading. I don’t have any plans to get into that debate, but there is one thing about insider trading that really caught my attention. Is Prohibition of Insider trading really fair?

In layman terms, prohibition of insider trading means – If you are an individual with potential access to non-public information about the company, you are prohibited from buying/selling stocks of that company based on that material non-public information. (NOTE: For simplicity, I am leaving out the type of insider trading that is legal).

Now, I perfectly understand why there are such restrictions on insider trading. But I still think it is UNFAIR. Here is why – Say, I am an insider of a company with significant number of stocks. Based on the material non-public information I have got access to, I can theoretically do either of 3 actions - BUY/SELL/HOLD-from-Sell (i.e., I've otherwise decided to sell, but changed the plans in the light of insider information)

First two (Buy/Sell) options need no further explanation but the third one (HOLD-from-Sell) is a tricky one!

To elaborate - Say, if a person has almost decided to sell his stocks and then suddenly came to know certain very confidential & critical information about the company that, in near future, would contribute to an increase the stock price significantly. He/She can then put plans of selling stock on HOLD based on this insider information & benefit significantly! None of the rules/laws that are present can catch this person in this instance!! It is not even possible to implement any rules/laws to catch this scenario as it is impossible to guess one’s “intentions to sell”.

As a result, we are ending up with a system – where two out of three scenarios are traced and punished, whereas, the third one, with the same implications, is just left free! Does n’t it make the system UNFAIR? I think, it does.

Why corruption is such a tough issue to deal with? – Taking Game Theory Perspective

Corruption is one of the most difficult problems to deal with, for majority of the developing countries. Many non-profit organizations are trying sincerely to bring awareness among citizens of these countries about the magnitude of the problem and possible solutions, but nothing seems to be actually working.

Having seen this problem of corruption first hand, I always wonder why it turned out to be such a hard thing to crack! In fact, this issue has so many faces to it - social, economic, cultural, political etc., But let me highlight one aspect that stands out from the perspective of our subject of interest - Game Theory!

To better demonstrate my point, let me take an example of a person "A" who wants to start a new business in one of these countries, where corruption is prevalent. Now, "A" has all the credentials & financials to make his/her case successfully. However, in this corrupted country, things won't work unless you bribe the government authorities, no matter how good your credentials are!

That leaves "A" with 2 options:

- Don't Bribe & Try to win the license only with his/her own credentials?

- Bribe the authorities (like rest of the competitors) and start your business!!

Payoff table looks something like this for this case – Assume the value of the project at stake is worth $100. Both players A & B are having equal chances of winning the project with NO CORRUPTION in picture. So, the value for both no-bribes is $50 each. If both payers pay a bribe of $10 each, they are left with a 40-40 (in bribe-bribe scenario). However, in the case of only one player paying the bribe, the probability of winning increases by 4 folds & hence the winner has a payoff of $70 ($80 – bribe of $10) and the other player has a payout of just $20.

Expected Profit		Player B
		Bribe	No Bribe
Player A	Bribe	40,40	70,20
	No Bribe	20,70	50,50

From the above table, it is a classic prisoner’s dilemma! Both the payers (A & Competitors) have dominant strategy – “Bribe”. Player “A” & the player “B” (Competitors) can actually coordinate and decide not to pay the bribe, there by improve their expected profits. But both the players have mutual doubts on other’s intention to defect.

This dilemma, I think, is one of the significant influencers that encourage people with otherwise honest (Anti-bribers) intentions to pay the bribes to get things done.

Does "Game Theory" offer a solution to eradicate corruption? Answer is NO & Yes. No, it does not offer any solution to this problem in specific. Yes, it does suggest way to get players out of this dilemma.

Alter the payoff structure so that “defection” is strictly punished with higher penalties and thereby, encourage players to cooperate! Say, there is a penalty of -40 enforced in case of defection & that changes the table as below –

Expected Profit		Player B
		Bribe	No Bribe
Player A	Bribe	40,40	30,20
	No Bribe	20,30	50,50

This takes out “defection” as an option for both the players & hence encourages the rational players to go for a Bribe-Bribe or NoBribe-NoBribe! Since No-bribe offers higher payoff, if the players are rational, they end up with a no-bribe choice.

(NOTE: There are multiple ways to make sure this kind of ENFORCEMENT mechanism can be introduced into the system, but leaving that part out here).