Monthly Archives: November 2017

Management Game Theory opens the HRM-Performance Black-Box

Game theory is the field of mathematical science to study human behavior and its effects at different environments. I have created management game theory to describe and study the complexities of organization performance management.

Management Game Theory includes theories of Human Capital Production Function and QWL-connection to performance (QWL = Quality of Working Life). These theories describe the management environment, therefore they form the theoretical skeleton for the game theory. The management game is Bayesian Stochastic Strategic Non-symmetric Signaling game. Game theory is needed to mathematically open the HR-management behavioral and stochastic nature. For example, researchers have identified the bundle of best HRM-practices that (usually) have good effect on business performance. However, these best practices may not help if they are implemented at wrong situation, or with poor quality. Stochastic means that your leadership behavior today has both short term and long term effects. All this and much more can be described mathematically using management game theory.

Leadership learning game

Figure. Management game theory Q-learning algorithm and practical game interface. Explained more at Healthcare Summit conference presentation.

QWL-index is based on motivation theories (e.g. Maslow, Alderfer, Kano). It explains the staff intangible assets utilization for team performance. You can read more about the scientific explanation from my earlier blog. QWL is a performance index defining the effective working time share from the time spend at work. Therefore QWL is production parameter at the following theory of Human Capital Production Function:

Revenue = K * HR * TWA * (1 – Ax) * QWL                 (equation 1)
EBITDA = Revenue – variable costs – Staff costs – Other fixed costs

K = business ratio, describing how much revenue one effective working hour makes
HR = staff size at full-time-equivalent
TWA = theoretical yearly working hours
Ax = Auxiliary working time (vacation, family leave, absence, training, HRM-practices)
QWL = Quality of Working Life index
EBITDA = operating profit

When these theories are connected to behavioral game theories you will open the HRM-Performance Pandora’s box. This means that you will see and experience all the hidden problems behind HRM-Performance, and when you see them you can learn to solve them. Game theory also teach how to improve HRM-Performance. We can also utilize artificial intelligence in solving those wicked problems and so help the organizations create competitive advantage.

Workers have internal need to improve and take care of their self-esteem. QWL describes the self-esteem factors combined meaning to performance. Workers are concerned about the problems that threaten their self-esteem. However, they have limited possibilities to affect to their QWL at workplace context. Therefore workers give opinions or other signals from the needs to improve their self-esteem and problems that threaten it. Workers get intangible reward from the improvement of their self-esteem and thus QWL-index.

Line managers are responsible for their team performance, which is usually measured by quantitative metrics like profit, revenue and time. Line managers and superiors have possibilities to improve workers QWL, but they seldom know exactly how. Some superiors know that workers’ self-esteem is linked to team performance. All superiors know that spending working time to HRM-practices reduce the scarce working time for making profit. Thus, line managers are in a dilemma over whether to do HRM-practices or concentrate on making profit. One has to note that money and related quantitative measurements are very powerful drivers for decision-making. Unfortunately many superiors prioritize short term profit, and so lose the long term competitiveness, as described at my previous blog. Line managers are rewarded from the team performance measured by profit.

HR-management department provides team leaders the bundle of good HRM-Practices. They try to teach these practices to superiors and hope that they also utilize the skills in practice. HRM department follows different HR-scorecards like absence, retention, turnover, skills, and wellbeing. Unfortunately, as long as these HR-metrics are not linked to fiscal monetary metrics they are not so interesting strategically.

Executives are responsible for organization overall performance which is measured by fiscal scorecards like revenue and profit. Human performance improvement they leave to HR-management’s concern. Besides the growth possibilities the executives concentrate on business logic and investments that improve the K-factor at Human Capital Production Function (Equation 1). Generally, executives’ strategic innovations cause problems and fuss at the organization, thus reducing the QWL at teams. In long term, only those organizations survives that can increase the K-factor and improve QWL at the same time or close intervals.

What is the benefits of Management Game theory? It makes possible to create new generation digital solutions for:

– phenomenal predictive people analytics

– leadership training using digital game based learning

– digitalized university level management education

– digitally powered Lean leadership implementation

– efficient human capital performance improvement

It seems that management game theory gives bona-fide theory for HRM-Performance, I could say if forms “Leadership DNA”. There are huge possibilities in this research, we have just scratched the surface. You can test the first version of Management Game Theory in practice by playing the Leadership learning game that is available from the link

Leadership Game is also available from Google store for android tablets.

Note, at that this so called Best Boss game you play ideal organization since all HRM-Practices are provided at full leadership skill powers.

Leadership social dilemma – reason for performance failure

By demanding monthly profit the superiors may think that they have to maximize team working time for making the profit rather than solving the workplace problems. This will unleash profit maximizing paradox – the more you require the profit the more likely it will not be achieved in the long run.

Leadership is one of the main sources of competitive advantage. Companies invest vast amounts of money and time for leadership development at all levels. However, the effectiveness of these training programs has remained ambiguous. Leadership continues to be the biggest challenge for business and HR management. Technology development and global business require better workforce skills improvement and utilization. The need for capable and effective people management has become more and more important success factor.

The leadership competence problem hides a multitude of reasons. Leadership training programs are not the only reason for poor outcome. New management game-theory reveals one essential problem that needs more sophisticated problem solving. In game-theoretical approach the leadership challenge is Bayesian Stochastic Strategic Non-symmetric Signaling game where the leader tries to find Nash-equilibrium between business profit and employee Quality of Working Life (QWL).

There seems to be one essential management cultural reason for leadership failure. If team leader management mind-set is profit maximizing there is great risk that equilibrium is never learned. Executives may cause harmful social dilemma for superiors. By requiring maximum profit the superiors start to think that they have to maximize the weekly profit rather than listening to the workers and solving the problems. Superior knows that problem solving will require scarce working time which is precious for making the profit, and money is too powerful driver.

Leadership social dilemma

Figure 1. Leadership social dilemma at management game theoretical approach.

Figure 1 illustrates the game-theoretical simulation of profit maximizing paradox – the more you require the profit the more likely it will not be achieved in the long term. This simulation is from Cash-Cow scenario where organization problems are relatively easy. Profit maximization may seem good strategy at the first, but when problems are not solved the fuss will increase, and eventually eat the team performance. The Quality of Working Life is the production parameter. The superior that solves the problems will gain value afterwards, thus creating competitive advantage through better human intangible assets utilization.

Management game theory reveals that line-managers should foster their management skills in three main areas:

  • Strategic leadership mind-set for prioritizing problem solving and improving QWL
  • Best leadership practice skills for performing management actions efficiency
  • Situational leadership sensitivity with empathy and emotional intelligence

Three competence areas

Figure 2. Leadership competence areas from management game-theoretical approach.

Management Game-Theory includes following methods:

We have made simulation learning game that utilizes new emerging management game theory with Q-learning method. At the simulation game the player will find optimal Nash equilibrium between team Quality of Working Life and fiscal long term profit. In the future the managers may ask our AI-game to advice in finding the winning HR-management strategy.

Now that we have solved the most critical problem – how to simulate human performance management – it is possible to implement Neural Network in finding the most optimal management strategies. So far we rely on human rational thinking in discovering the optimal management behavior. You can test your HR-management strategy and situational problem solving by playing the Best-Boss simulation game. Note, at this simplified learning game your HR-practice skills are set to maximal value, making it easier to have higher scores.

Link to simulation learning game:

Note. IE not supported. First chose the language from right corner.


Bersin J. (2014). Global Human Capital Trends 2014: Engaging the 21st-century workforce, Deloitte University Press.

Gerald C. K., Doug P., Anh N. P., Kiron D. and Buckley N. (2015). Strategy, not technology, drives digital transformation. MIT Sloan Management Review,

Kesti M. (2017). Leadership DNA by game theoretic approach: Finding optimal equilibrium for wellbeing and productivity. Conference Paper, Healthcare summit, Lisbon, Portugal,

Kesti M., Leinonen J. and Kesti T. (2017). “The Productive Leadership Game: From Theory to Game-Based Learning.” Public Sector Entrepreneurship and the Integration of Innovative Business Models. IGI Global, 2017. 238-260.

Kesti M. and Syväjärvi A. (2015) Human Capital Production Function in Strategic Management. Technology and Investment6, 12-21.