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The Art of Strategy: A Game Theorist's Guide to Success in Business and Life, by Avinash K Dixit and Barry J Nalebuff
STRATEGIC thinking is for everyone. We all decide and many of these decisions involve the decisions of others. This book on strategy, from the point of view of game theory, will sharpen your decision-making in many areas of your life.
Strategy can be understood as the adversarial act of beating a competitor, while being aware that the competitor is trying to beat you too. All too often, strategy is developed with nowhere near enough awareness of the possible behaviour of the competition.
“Game Theory”, on the other hand, starts with the assumption that you are “playing” against a competitor who is trying as hard as you are to beat him, and not get beaten. “It is the art of putting yourself in others’ shoes so as to predict and influence what they will do.” However, it need not be wholly adversarial: in the game one option is to cooperate for the better good of both players.
Game theorists believe some simple basic principles can lead to a somewhat more scientific approach to strategy. Game theory will never achieve the status of a science because we are always dealing with people who are unique and driven by values, aspirations, and more, rather than by a set of universal rules.
Game theory is a relatively young discipline, but it has already gathered many useful insights for decision-making and practical strategy. The use of the word “game” highlights both the competitive aspects as well as the participation of other parties, whose moves will influence our choices.
It is common in Game Theory to use examples that have the benefit of identifying central issues across a wide spectrum of strategy problems. Accessible examples are an effective vehicle for conveying the important ideas.
The Prisoners’ Dilemma
Perhaps the most well-known example is that of the Prisoners’ Dilemma. Two prisoners, held separately, are offered the opportunity to confess to the crime they are accused of committing, in return for a light sentence. They both doubt there is hard evidence against them. If neither confesses, they are likely to be acquitted. If either one confesses, the other will be severely sentenced. Since they cannot confer, what would be the most prudent course of action for each one of the prisoners?
The principles behind this game are very similar to decisions a retailer might have to make regarding pricing. If one prices goods high, there will be a greater profit margin. If, however, the competitor lowers the price, the first retailer will see his customers defecting. If the first competitor lowers his price and the competitor retains a high price, he will benefit greatly. If they both lower prices, both will return smaller profits.
In the world of commerce, the game is rarely played out once, and most often with multiple players. The logic of the Prisoners’ Dilemma remains the same, if in a more complex form. Much work has been done over the years to try to identify the most effective strategy in these situations. John Harsanyi, John Nash and Reinhard Selten received the Nobel Prize for their work in Game Theory and its contribution to economics, as did Robert Aumann and Thomas Schelling.
Identifying how these “games” are best played has ramifications for decision-making in fields from strategy to wage negotiation. Where the game requires simultaneous moves, there is usually a solution known as the “Nash equilibrium” (after John Nash, subject of the movie A Beautiful Mind.)
John Maynard Keynes, the 20th century economist, used the concept of a newspaper beauty contest, popular at the time, to understand the stock market. Newspapers in his day published pictures of beautiful women and ran a competition where the winner would be the person who correctly predicted which contestant most would consider the comeliest.
A stockpicker, Keynes explained, wishes to select stocks which will appreciate in value. A “hot stock” is one everyone thinks that everyone else thinks is a desirable item.
Any of the many games described in “The Art of Strategy” has compounded effects that make it more complex. If a prisoner chooses to confess in order to receive a light sentence, his decision might be coloured by the thought of the friends of the prisoner who did not confess, waiting for him on his release.
The presence of a well-respected stockpicker may change the opinion of investors in either direction.
Game theory aims to provide decision-makers with at least a method, if not a definitive answer on how to make decisions based on the decisions others.
This book has the feel of a university course conducted by charismatic professors with a unique ability to make very complex ideas accessible and entertaining.
“All of us are strategists, whether we like it or not. It is better to be a good strategist than a bad one, and this book aims to help you improve your skills at discovering and using effective strategies,” say the authors - and they deliver on that promise.
Readability: Light ---+ Serious
Insights: High -+---- Low
Practical: High --+-- Low
* Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Strategy that Works. Views expressed are his own.
