|
Also See:
A CIO's Guide To IT Portfolio Management
8 Rules For Better Executive Collaboration
By Ellen Pearlman
Strategic Thinkers: Avinash K. Dixit and Barry J. Nalebuff
Credentials: Dixit and Nalebuff are world-renown experts on game theory.
Dixit is the John J. F. Sherrerd '52 University Professor of Economics at Princeton University and the author of eight other books. Nalebuff is the Milton Steinbach Professor at Yale School of Management and has experience as a consultant applying game theory to business strategy. He is also the cofounder of Honest Tea one of Inc. magazine's fastest growing companies.
Big Idea: Game theory can help you outmaneuver your rivals or find ways to cooperate with them.
Book: The Art of Strategy: A Game Theorist's Guide to Success in Business and Life, published by W.W. Norton & Co., September 29, 2008.
Game theory is probably best known through the movie A Beautiful Mind, about the breakthroughs and breakdown of mathematician and Nobel Prize winner John Nash. While much writing about game theory is full of jargon and mathematical formulas, the authors of The Art of Strategy, Avinash Dixit and Barry Nalebuff try to turn the science into insight, explaining how the thinking can be applied to business strategy, sports, politics and everyday situations.
Game theory looks at how decisions get made and how one person's strategy impacts the other. When a person figures out her strategy she must also take into account her opponent's strategy. But, of course, her opponent knows she is doing that and must then take into account how that will influence her behavior. This thinking can get quite circuitous. If you've ever seen the scene in the movie The Princess Bride where the villain Vizzini tries to figure out which glass of wine the hero Westley has put the poison in, you know what I mean.
I confess that at times the authors lost me, even as they tried to turn mathematical logic into understandable strategy. Some of their exercises and explanations seemed too convoluted and academic to be useful in a real-world setting. But for those readers who enjoy creating logic trees and tables, the thinking will be easier to follow. Still, there is plenty of useful information and some surprising insights into how game theory can help you determine your best advantage in a negotiation or contest.
The authors do point out that strategic thinking is part art and part science. But game theory, they say, is the foundation that can be used to improve your strategic moves. They use some cultural examples to point out how often game theory can be applied to situations you might face in business and life. In one example they explain how it can be used to help participants in the TV game Survivor have a better chance of winning. In the example cited, they show how one of the three finalists improves his chance of being the final winner by losing a challenge with the other two members instead of trying to win it.
And in another example they show how you can use game theory to figure out the best answer to a multiple-choice question on the GMAT exam, even if you don't read the question. This strategy involves thinking about the objective of the person writing the test.
There are some general principles that crop up about games and the moves that players can make to improve their position. Generally, moves in a game are either sequential or simultaneous. In a sequential game the players make alternating moves. In these situations each player is advised to use a game tree to plot what they think the other players' future moves will be and use that knowledge to calculate their own best current move. They call this rule: Look forward and reason backward.
For simultaneous interactions, where players act at the same time ignorant of the other person's current actions, players must try to put themselves in the other person's shoes to try to figure out the best outcome. Constructing a table that shows the payoff of various actions can help players assess the results of all possible actions. In order to reduce the possible options to a manageable level, the authors advise looking to see if either side has a "dominant strategy" that outperforms all other choices. If so, they say, "use it." If you don't have a dominant strategy but your opponent does, then you should count on his using it and plan your actions accordingly. And if no one has a dominant strategy, but either party has a "dominated strategy" (a strategy that is always worse for the person playing it than all other strategies), that strategy should be eliminated from consideration. And if you find that you have neither dominant or dominated strategies or if you have simplified your options as much as possible then you should look for an equilibrium, "a pair of strategies in which each player's action is the best response to the other's." If a unique equilibrium is found (called the Nash Equilibrium) that is the strategy that all players should choose.
The authors also explain that sometimes you want to change the game in your favor by taking some action, or "strategic move." An example cited is the game of chicken, where two drivers race to a head-on collision; the first to turn away is the loser or chicken. Clearly this is a dangerous game. How can you influence the outcome? One far-fetched, dangerous option is to disconnect your steering wheel from the shaft and throw it out the window. Crazy you may think, but your rival now knows that you cannot swerve. That move changes the game. You now have only one strategy—go straight, while your opponent's best choice now is to swerve. By removing your options you become a winner in this game.
Threats and promises are also strategic moves that let your opponent know how you will respond to their actions. The purpose of using these techniques is to compel someone to do something they might not otherwise do or to deter someone from doing something they would otherwise do. Is one of these techniques preferable to the other? According to the authors the answer depends on the cost and the purpose.
A threat is costless if it is successful (since you don't have to carry it out if the other person changes their behavior). A promise, on the other hand, has to be kept if it is successful in achieving the desired affect. For a threat or promise to be effective the other player must believe you mean business. But the authors advise keeping the threat to the lowest level needed to be effective and increasing it gradually if need be. This is also the art of brinkmanship, a strategy named by University of Maryland Economic Professor and Nobel Laureate Thomas Schelling. The idea is to deliberately create risk and take your opponent to the brink of disaster to get him to blink first. The Cuban missile crisis is the most famous example of this strategy, but we all recognize it from the many confrontations we have faced in business and personal relationships. The authors recommend using this strategy with care since you may end up at the brink even if neither of you want to. Do not use this strategy, they warn, if you know in advance that you will "blink first."
Perhaps the most important lesson to be learned from game theory is how to manipulate and interpret information. Actions speak louder than words and experienced game players will try to conceal any knowledge that could hurt them if it leaked out. Likewise they will leak any information that works to their advantage. Actions that promote favorable leaks are called "signaling" and actions that seek to reduce or eliminate unfavorable leaks are called "signal jamming." For example, a person selling a car may offer a warranty to signal the quality of the car.
Finally, one last strategy, called "screening," can help you dig out the information you seek. Screening requires you to set up a situation where it's optimal for the other person to take one action if the information was one kind, and another action if it's another. In that way, the action itself, or inaction, reveals the information you are seeking. The authors offer this true story as an example: A woman was in love with a divorced man with children. She wanted to get married and have kids. He told her he wanted the same thing, but she wasn't sure he meant it. To find out if he was sincere she wanted a credible signal. So she asked him to get a tattoo with her name. (It could be small and discrete, so that no one else would see it but her.) She reasoned that if he was committed to her he wouldn't mind. But if he wasn't, he wouldn't agree. He balked. She left. She found another guy and got married. He's still unattached.
Sometimes game theory is simple and intuitive. Other times it's complicated and crafty. But if you have a logical mind and are intrigued by how it can be applied to your business strategy or your poker game, give it a try.
Excerpts from The Art of Strategy: A Game Theorist's Guide to Success in Business and Life, published by W.W. Norton & Company, Inc. Copyright (c) 2008 Avinash K. Dixit and Barry J. Nalebuff. All rights reserved.
Also of interest:
CIOZone Question: What techniques do you use for getting the information you need about an opponent?
|
