The Analogous Application of Game Theory and Monte Carlo Simulation Techniques from World War II to Business Decision Making

Abstract

The Second World War, one of the most gruelling events in the history of mankind, also marks the emergence of one of modern-day’s most widely used scientific disciplines – Operations Research (OR). Rather than defining OR as a ‘part of mathematics’, a better characterization of the sequence of events would be that some mathematicians during World War II were coerced into mixed disciplinary units dominated by physicists and statisticians, and directed to participate in an assorted mix of activities which were clubbed together under the rubric of ‘Operations Research’. Some of these activities ranged from curating a solution for the neutron scattering problem in atomic bomb design to strategizing military attacks by means of choosing the best possible route to travel. Thus arose two major Operations Research techniques – Monte Carlo Simulation and Game Theory. More than 70 years later, managers face business problems that often seem as complicated as the design of an atomic bomb. Models of pricing buy-back and revenue-sharing negotiations, product decisions, principal-agent decisions, supply chain design, advertising decisions, options and futures trading or allocation of funds are usually too complex to solve in simple mathematical terms. In the first part of this paper, we discuss in-depth, how mathematicians leveraged the two aforementioned OR techniques during World War II. In the latter part of the paper, we map both these techniques to the current business scenario and suggest ways of using them to make better managerial decisions.