Monday, November 2, 2015

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

The second half of the paper provides many examples of the application of theory to the process of succession, which, without the expertise of a mathematician, appears visually in the form of many complex equations and is somewhat challenging to read. But even the authors note that although “the equations may seem a bit complicated, the real idea is to understand the outcomes of the analysis,” and therefore professional family business advisors need not wade through the equations in the paper in order to understand the relevance of the application of game theory to succession.

Looking at management succession as a series of rational choices made by individuals, game theory identifies the actors directly involved, estimates their “payoff functions” – their incentives and payoffs for their choices – and identifies their possible strategies. This provides a platform for understanding the nuances and intricacies of the succession process and its related events. As a result, “[g]ame theory addresses two of the three major problems related to understanding management succession: that the actors have no (or limited) experience and that succession involves emotions as much as it does rational decisions (Duh et al., 2009).”

Particularly because “harmonious successions are the exception” rather than the rule, the authors point out that game theory is especially useful because it recognizes the interdependency and interconnectedness of the actors. Another reason it is very useful is that since successions involve “a dizzying amount of information with many interconnections,” the process often involves hard choices and the acceptance of less-than-optimal outcomes, which can be articulated and factored into game theory in order to help “decision-makers clearly articulate the information on which they are making choices.” That is, since there are choices within the process which often include conflict and indecision, indecisiveness is not far behind, and game theory can help to clarify this.

The complexity of the process of succession combined with the studies done to date on this subject, the authors argue, show that a single theory likely could not ever successfully demonstrate the intricacies of succession. The authors admit that their theory, and their paper, is general and only provides an introduction of game theory as it can be applied to management succession. But they argue successfully that game theory a) provides a solid foundation of how it can be applied to succession; b) is a rigorous tool, and c) is agile enough to include subsequent, more complex and more complicated dynamics than they have thus far included as examples in the paper.

By the end of the paper, one feels quite convinced that this ‘new’ theory (as in, new to the family business field) could and may very well advance the study of family business, as the authors write, by improving both the theoretical and empirical basis of research and by applying it in conjunction with other frequently used theories (such as agency theory, stakeholder theory and the resource-based view of the firm).

While the details of this theory and research paper are not necessarily relevant or immediately applicable to most professionals who work with or within family firms, the very prospect of game theory becoming applicable and more broadly used in relation to succession would provide an interesting and hopeful avenue which may lead to better solutions and better understanding of the complicated process of succession.

Written by Jennifer Halyk for IFEA

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


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