Game Theory and Elon Musk Taking Tesla Private
https://www.nytimes.com/2018/08/25/business/elon-musk-tesla-private.html
Elon Musk, perhaps the most prominent figurehead in the technology world, was in the news recently when he hinted on Twitter that he was considering taking his electric car company, Tesla, private. Musk felt that the short term downsides of a publicly traded company, such as the need to publish quarterly earnings reports, dependency on a “volatile stock price”, and “short sellers betting that Tesla would fail” were preventing him from achieving his goals in creating a sustainable future. Going private would’ve allowed Tesla to obtain stable, private funding as opposed to public investment, which can be easily swayed by poor numbers on an earnings report. In fact, Musk had already started working on his plan to go private by reaching out to Saudi Arabia for funding and meeting with Tesla’s board of directors.
Just 3 weeks later after the initial tweet, however, Musk turned back and said that the plan to go private was scrapped. He gave several reasons for this decision, but the biggest one was the interest of investors, many of whom would no longer be able to be investors if Tesla went private due to “regulatory reasons.” Many shareholders reached out to Musk and asked him to keep Tesla public. Furthermore, there was the contradictory nature of cooperating with Saudi Arabia, who are very much proponents of fossil fuels, exactly what Musk is trying to make obsolete. After reweighing these factors, Musk decided to stick with Tesla being a public company.
This situation can be modeled as a game between 2 players: Elon Musk and his investors. Musk has 2 moves: make Tesla private or keep it public. The investor also has 2 moves: remain as an investor or to pull out. Both players want to maximize their payoffs and their payoff are related to each other: if investors profit, then they will invest more and Musk will profit. Initially, Musk was considering turning Tesla private, which may have had a large payoff for him, but would’ve had a a poor payoff for investors. Then Musk decided to stick with keeping Tesla public, which may have had a a smaller payoff for him than going private, but a bigger payoff for investors. One might say that Musk acted irrationally in this case because he picked a choice that gave himself a smaller payoff, but this model fails to take into account that keeping investors also contributes to Musk’s payoff in the long term. It is more useful to look at Musk’s payoff’s in 2 parts: short-term and long-term. Going private might give more short-term payoff than staying public, but staying public would give more long-term payoff that might eventually be greater than the short-term payoff of going private. If that is the case, then we can say that Musk picked the Nash equilibrium: the investors’s best response for Tesla remaining public is to keep investing, while Musk’s best response to continued investment is to keep Tesla public. This mutual best response behavior is what tells us that it is a Nash equilibrium.