The Prisoner's Dilemma: Applying Game Theory to Agile Contracting

room: Grand Ballroom A — time: Wednesday 14:00-14:45, Wednesday 14:45-15:30
Level: Practicing

I propose that the larger issue with Agile Contracts is not that we don’t know how to write them. After all we know how to deliver Agile projects, so a contract can simply describe that process. The problem is with making Agile Contract commercially competitive; against suppliers who are offering the promise of delivering the perfectly predicted dream - offering the certainty that people crave. This is a prisoners dilemma, with organisations driving themselves towards a sub optimal solution. Through game theory we will explore ways in which to improve the appeal of the agile offering.


Who am I to talk about contracts and game theory:

  • My Education
  • Comp Sci, MBA, Corporate Law, Behavioural Economics
  • My Experience
  • Large scale contract negotiations

What is a contract, really?

  • A contract is not a piece of paper
  • A contract is not a plan
  • Invitation to treat

The Agile Manifesto on Contracts

  • Customer Collaboration over Contract Negotiation
  • Sounds good, but how easy is it to do in practice?
  • What other parts of the manifesto push the “contracting buttons”? - quite a bit!
  • Satisfy the customer? Or Satisfy the contract? The Agent principle problem again. (exercise/demonstration)
  • When contracts are required
    • Based on the distribution of Scrum Roles
    • Based on limitations to agility
  • Agile Challenges the rules, so why did we expect our standard contracts to fit?
  • Sidebar: Positive vs Natural law. The letter vs. “What is fair”
  • What were contracts originally intended to do?
  • Where did contracts come from? What is their basis in law?

Game Theory, Decision Theory and Moral Hazard

  • Introducing the Prisoners Dilemma (exercise)
  • How do people make decisions?

    • Economic Naturalism
    • How cognitive limitations affect consumer behaviour
    • The Agent Principle Problem
    • Your personal history and it’s effect on opportunistic behaviour
  • So you think you’re rational (exercises)

    • Single shot two player games
    • Multiple round two player games

      • for the two player games, the audience splits into threes, 2 playing, one observing and plays through the exercises as presented - observer reports back on findings both subjective and objective (score sheets provided)
    • Single shot Multi player games (tender/bid simulation)

    • Multiple round multi player games (blind auction simulation)
      • As above, but larger groups (4-5 players)
    • In which contracting situations are we playing these “games”? (examples)
      • What were our outcomes?
      • Did the “players” truly believe they were being rational?
      • What were the expected pay-offs? What were the actual pay-offs? What was the “optimal solution”
  • Why do we “document” contracts

    • Understanding legal reasoning
    • Example of poor use of contracts
    • Who’s at risk?
      • Why contracting is a game
      • “I will pay £500 to anybody who returns my lost kitten”

What are the real problems with Agile contracts?

  • Why organisations are incentivised to choose the Waterfall solution
    • Based on experiences in the simulations, would you really choose differently?
    • What an Agile contract really represents, and why that scares people
    • Theory of Altruism
    • Agile is Rational, people are not. Ironic?

How we can improve the contracting process to make agile projects more palatable

  • How Decision and Game theory has aided other disciplines
  • “Changing the tax system” - impossible, or at the very least, not worth it. I’m rational! What advantage is there to me!
  • Legal reasoning is not the same as project delivery
  • Co-operative dispositions can solve prisoners dilemmas!

Practical Applications for the Future

  • Long term objectives
  • Incentive Schemes for sales people
  • Agile procurement

But I need wins tomorrow!

  • Short term wins
  • Moving from theory to practice
  • A contract has to be acceptable in order for it to be effective
  • The typical pain points and how to ease them:

    • Lawyers
    • Procurement
    • Requirements for a contract to be truly enforceable
  • The effect of co-operative behaviour on our Prisoners Dilemma (final exercise)

Learning outcomes
  • What is a prisoner’s dilemma and why this matters for agile contracting
  • Why organisations still choose waterfall contracts even if they believe in Agile
  • Understanding the commercial decision process in a variety of acquisition situations
  • How an understanding of decision and game theory has improved other disciplines
  • Why organisations feel they are better off choosing a Waterfall contract even if they believe in Agile
  • What an Agile contract really represents, and why that scares people
  • How we can improve the contracting process to make agile projects more palatable
  • Which contracting and sales situations are particularly “Agile hostile”, and why
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