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What do King Solomon, David Lee Roth, Zappos and Nigerian scammers have in common?

May 22, 2014 Finance

What do King Solomon, David Lee Roth, Zappos and Nigerian scammers have in common?  A recent edition of the Wall Street Journal included an essay adapted from the book “Think Like a Freak” by Steven D. Levitt and Stephen J. Dubner of “Freakonomics” fame that provides the answer:  the practice of “game theory.”

In their typical entertaining and thought provoking style they provide various examples of how game theory has been used in very diverse settings throughout the years, and how it can be applied today. Their simplified definition of game theory is “the art of beating your opponent by anticipating his next move,” but their examples got me thinking that the “opponent” is not always someone that you are trying to defeat, but also can include behavior that you are trying to avoid or discourage.  Such behavior would include embezzlement, lack of attention to detail, lack of competence and taking quality shortcuts.

It even made me realize that I apply a kind of game theory in my own practice.  The age-old practice of reconciling a bank account has become quite easy thanks to online banking and automated reconciliation systems.  In fact it has become almost too easy. In fact, some bookkeepers and accountants reconcile their accounts even before all of the activity for a month has been recorded on the books.  The resulting reconciliation, while informative, does not achieve the core purpose of a bank reconciliation which is to reconcile the month end bank balance to the month end financial statement.  As a result, one of the first things I look for at a new client is whether the bank reconciliation ties out to the month end financial statement.  If it does not, I immediately understand that there is a problem with attention to detail, accounting competency or perhaps even honesty.  Playing this simple “game” quickly identifies areas of concern. When you read the article, you will understand that the bank reconciliation is the accountant’s version of David Lee Roth’s “brown M&M’s.”

I am going to focus on other similar “games” I can use in my own work and can recommend to my clients.  How can you defeat your everyday “opponents” by employing game theory?

Connect With Doug: Doug Jones is part of our fractional CFO & controller practice, providing senior financial management services to small and mid size organizations on an “as needed” basis.  In addition to serving his own clients, Doug manages relationships with companies using other fractional resources on a short term, long term or project basis.  Doug has over 25 years of experience as a CFO with various middle market companies, in addition to experience with several Fortune 500 firms.  Doug holds the Certified Management Accountant (CMA) designation.

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