The Relevance of Game Theory to Succession in Family Firms (Part I)

In the article “Game Theory and Family Business Succession: an Introduction” by Timothy Mathews, Tim Blumentritt and Gaia Marchiso in the March 2013 issue of the journal Family Business Review, game theory is introduced as a framework through which to examine succession as a series of decisions about a family firm’s leadership, for the purpose of better-understanding the outcomes of succession events. Despite the complicated use of mathematical equations inherent in this theory, the authors make a strong case for the relevance of game theory and its effective application to succession.

Experts in the field of family business widely agree that succession is the single-most-often cited challenge or hurdle for family businesses, and that many studies have been conducted in an effort to understand succession and help to alleviate its ensuing problems. However, in all of the studies to date on succession and its related factors, none have “explor[ed] specific decision-making processes involved in the succession process,” especially in the “presence of conflict or indecision,” which is the basis of reasoning for this unique application of game theory to the process of succession.

Using game theory as a tool to analyze interactions between two or more ‘players,’ or ‘actors,’ the authors argue that the application of game theory could create potential for a significant step forward in the study of family business succession and “allows for a more sophisticated and insightful analysis since the decisions … [are analyzed] as interdependent choices.” Furthermore, it creates an opportunity to test these models empirically, which would also be a significant step forward in the study of succession.

The authors explain the basic tenets of game theory in the first half of the paper, and then apply it to basic succession events in the second half. The introduction to game theory and the examples of the application of game theory operate on several assumptions, including the assumption that the family wishes to retain family control of the firm; which, as professional advisors know, is not necessarily or always the case, but which is a necessary hypothesis in order to explain the application of the theory to the process of succession.

While informative, the first half of the paper on the introduction to game theory itself is only interesting in relation to family business because of its proposed effectiveness when applied to the complex family dynamic: “[t]he power of game theory rests in its ability to analyze situations in which the choices and actions of multiple players are interactive and mutually dependent: The outcomes experienced by one actor are influenced by the choices made by the other actor(s) in the game.”

Written by Jennifer Halyk for IFEA

Part II will appear next week.

Article Citation:

Tim Blumentritt, Timothy Mathews, and Gaia Marchisio

“Game Theory and Family Business Succession: An Introduction.”

Family Business Review March 2013 26: 51-67, first published on October 4, 2012 doi:10.1177/0894486512447811