The Art of Strategy (2008), introduces game theory and its applications to thinking, strategies, effective life and business choices, as well as social-level dilemmas.
The book updates and expands the authors’ previous book Thinking Strategically.
- Exec Summary
- FULL SUMMARY
- Win-Win Is Crucial (The Authors Found Out)
- In Business, Let Others Make Risk The First Move
- Negotiate With Psychology In Mind
- High Power & High-T Men Break Game Theory’s Rules
- The 3 Rules of Game Strategy
- Encourage Cooperation & Discourage Competition
- Takeaways From Game Theory Experiments
- How to Achieve Cooperation
- Threats VS Promises
- MORE WISDOM
- Focusing on competition only is a major strategic (and mindset) mistake
- Cooperation is foundational to life and business success
- Good strategy is to maximize the scope for cooperation, while minimizing the scope for cheating (from others, at least)
- Good strategy MUST include psychology
About the Authors:
Barry J. Nalebuff Barry is a Professor of Management at Yale School of Management and specializes in business strategy and game theory.
Avinash K. Dixit hols a B.Sc. in Mathematics and Physics, and a Ph.D. from the Massachusetts Institute of Technology in Economics. He is a Professor of Economics at Princeton University.
Win-Win Is Crucial (The Authors Found Out)
I found the intro to the new edition to be a little pearl of wisdom in itself:
When we wrote Thinking Strategically, we were younger, and the zeitgeist was one of self-centered competition. We have since come to the full realization of the important part that cooperation plays in strategic situations, and how good strategy must appropriately mix competition and cooperation.*
Approaching life with competition-only in mind is a recipe not only for lack of success, but also for an unfulfilled life.
Cooperation Must Take Place Even With Selfish Interests
Adds the authors on defining strategy:
We started the original preface with: “Strategic thinking is the art of outdoing an adversary, knowing that the adversary is trying to do the same to you.” To this we now add: It is also the art of finding ways to cooperate, even when others are motivated by self-interest, not benevolence. It is the art of convincing others, and even yourself, to do what you say. It is the art of interpreting and revealing information. It is the art of putting yourself in others’ shoes so as to predict and influence what they will do.
In Business, Let Others Make Risk The First Move
There are two ways to move second.
You can imitate as soon as the other has revealed his approach (as in sailboat racing) or wait longer until the success or failure of the approach is known (as in computers).
The longer wait is more advantageous in business because, unlike in sports, the competition is usually not winner-take-all. As a result, market leaders will not follow the upstarts unless they also believe in the merits of their course.
Negotiate With Psychology In Mind
The authors tell a story of negotiating with a taxi driver.
Then the taxi driver heard about the book and explained WHY he drove them back:
My meter was broken, but you didn’t seem to believe me. I was too tired to argue. When we arrived, I asked for 2,500 shekels, a fair price. I was even hoping you would round the fare up to 3,000. You rich Americans could well afford a 50¢ tip.
I couldn’t believe you tried to cheat me. Your refusal to pay a fair price dishonored me in front of my wife. As poor as I was, I did not need to take your meager offer.
The authors forgot that people have such a thing as honor, and crave (basic) respect.
Read more in our article on how to power protect:
No, the author never received that later, they later admit.
BUT the principle still applies.
Indeed, here’s more actual scientific evidence for this principle:
High Power & High-T Men Break Game Theory’s Rules
… Unless you add psychology to the mix.
Say the authors (note in parenthesis is mine):
Some biological evidence for rejecting unfair offers comes from an experiment run by Terry Burnham.
In his version of the ultimatum game, the amount at stake was $40 and the subjects were male Harvard graduate students. The divider was given only two choices: offer $25 and keep $15 or offer $5 and keep $35. Among those offered only $5, twenty students accepted and six rejected, giving themselves and the divider both zero. Now for the punch line. It turns out that the six who rejected the offer had testosterone levels 50 percent higher than those who accepted the (unfair) offer. To the extent that testosterone is connected with status and aggression, this could provide a genetic link that might explain an evolutionary advantage of what evolutionary biologist Robert Trivers has called “moralistic aggression.”
This is evidence that you want to power protect more with high-power people.
The 3 Rules of Game Strategy
The rules as written by the authors:
- Look forward and reason backward
- If you have a dominant strategy, use it. A dominant strategy is the best choice for a player, regardless of what the other players decide to do
- Eliminate from consideration any dominated strategies and strategies that are never best responses, and go on doing so successively
Obviously, the authors are smart men.
And they wrote the rules for other high-IQ men, rather than in a more appealing mass-market format 🙂
Rule #1 seems to be the most significant to me:
Rule #1: Look Forward & Reason Backward (Anticipate Their Moves)
The general principle for sequential-move games is that each player should figure out the other players’ future responses and use them in calculating his own best current move.
The authors call the rule “Look forward and reason backward.“
Encourage Cooperation & Discourage Competition
This is the approach we have taken since our inception.
And the same approach Power University has taken since its first version.
So it was good to see that two game theory experts reached the same conclusion.
Say the authors as they start their review of game theory tournaments:
The reason tit for tat won the tournament is that it usually managed to encourage cooperation whenever possible while avoiding exploitation.
The other entries either were too trusting and open to exploitation or were too aggressive and knocked one another out.
Tit for tat always strikes back when others cheat.
And it never cooperates again with cheats.
The authors say that this strategy can even be improved with MORE cooperation.
Say the authors:
In spite of all this, we believe that tit for tat is a flawed strategy.
The slightest possibility of a mistake or a misperception results in a complete breakdown in the success of tit for tat. This flaw was not apparent in the artificial setting of a computer tournament, because mistakes and misperceptions did not arise. But when tit for tat is applied to real-world problems, mistakes and misperceptions cannot be avoided, and the result can be disastrous.
What tit for tat lacks is a way of saying “Enough is enough.” It is too provocable, and not forgiving enough. And indeed, subsequent versions of Axelrod’s tournament, which allowed possibilities of mistakes and misperceptions, showed other, more generous strategies to be superior to tit for tat.*
Basically, the authors are saying that in real life it pays to at least try to break a “vicious cycle of nasty escalation and revenge” that leads to lose-lose.
And indeed, say the authors, “subsequent versions of Axelrod’s tournament, which allowed possibilities of mistakes and misperceptions, showed other, more generous strategies to be superior to tit for tat“.
This is also a concept we incorporate in Power University, including how and when to use it.
Takeaways From Game Theory Experiments
- Cooperation occurs significantly often, even when each pair of players meets only once
- People love punishment of “social cheaters”
- Punishment of cheats increases cooperation and the contributions in the first phase of the game dramatically
How to Achieve Cooperation
This is a bit complex since The Art of Strategy seems to have two sections on cooperation.
I’ll try to combine them:
- Ability to detect cheats, best of all if done automatically
- Ability to punish cheats
- Adequate size of punishment, that must discourage cheats. But punishment can be too big. Nuclear deterrent for example is not a good punishment for many crimes since it may never be used
- Clarity of “good behavior” and consequences for not following it
- Certainty of rewards and punishments
- Repetition, the longer the exchange, the higher the incentives to cooperate. The shorter the relationship, the higher the incentives to cheat
- Future opportunity considerations: for example, a growing business may expect to lose even bigger in the future by cheating now. If they instead think they’re struggling and may die, the incentives to cheating are higher
- Stability of players over time. The more the players stay the same, the more cooperation is likely. The bigger the churn, the higher the incentives to cheating
- No clear final step, because that final step would remove the payoffs of further cooperation, and increase the payoffs for cheating
Threats VS Promises
There are some advantages to threats:
A threat can be less costly; in fact, it is costless if it is successful. If it changes the other player’s behavior in the way you want, you don’t have to carry out the costly action you had threatened.
A promise, if successful, must be fulfilled—if the other player acts as you want him to, you have to deliver the costly action you had promised.
If you use a threat, always start at the smallest level, and increase over time.
This is a concept we also use in Power University on “how corruption works”.
Game theory MUST include psychology
Say the authors:
Some people question how we can apply logic and science to a world where people act irrationally. It turns out that there is often method to the madness.
Indeed, some of the most exciting new insights have come from recent advances in behavioral game theory, which incorporates human psychology and biases into the mix and thus adds a social element to the theory. As a result, game theory now does a much better job dealing with people as they are, rather than as we might like them to be.
The hot hand may not be a fallacy
Top players and players who’ve had a winning streak may not score more.
But they can exhaust more resources from the opponents who have to spend more time worrying about them. And that may leave some other teammates freer to exploit more opportunities.
Show, Don’t Explain
Whenever you can, make people feel the answer in their bones:
Khrushchev first denounced Stalin’s purges at the Soviet Communist Party’s 20th Congress.
After his dramatic speech, someone in the audience shouted out, asking what Khrushchev had been doing at the time.
Khrushchev responded by asking the questioner to please stand up and identify himself. The audience remained silent. Khrushchev replied, “That is what I did, too.”
This worked great because Khrushchev made the heckler -and the audience- feel the fear.
Now his answer of why he didn’t speak up was obvious to anyone in their bones.
Collusion of Low-Power Followers Is A Great Strategy Against Bad Bosses
In this case study, the despotic bosses are parents:
Imagine that parents want each of their children to visit once and phone twice a week. To give their children the right incentives, they threaten to disinherit any child who fails to meet this quota.
The children recognize that their parents are unwilling to disinherit all of them. As a result, they get together and agree to cut back the number of visits, potentially down to zero.
Education Is Costly Signaling
People saying that a degree is useless are missing the point.
Say the authors:
Skills needed to succeed in particular firms and specialized lines of work are often best learned on the job.
What employers cannot easily observe but really need to know is a prospective employee’s general ability to think and learn.
A good degree from a good college acts as a signal of such ability. The graduate is in effect saying, “If I were less able, would I have graduated Princeton with honors?”
The authors also say that this costly signaling only leaves the colleges better off.
Everyone else bears the costs of that wasteful signaling.
So, should you go to college?
Well, turns out, there are some other advantages besides learning and signaling:
Most armies would be finished if each soldier on the battlefield started to make a rational calculation of the costs and the benefits of risking his own life.
Also read our case study why great leadership is great manipulation.
On “enlightened collusion” for peaceful co-existence:
But was the escalation of the superpowers’ nuclear arms arsenals all that different? Both incurred costs in the trillions of dollars in quest of the “dollar” of victory. Collusion, which in this case means peaceful coexistence, is a much more profitable solution.
The Art of Strategy is a fantastic book.
Some notes I feel like adding not just to the book, but to game theory in general:
Game theory without psychology is utterly useless
OK, OK, this title is provocative.
But hear me out.
Experiments with actual people, the authors themselves show, break one of their own major “rule” of optimal behavior:
Therefore the logic of dominant strategies applies to the 99th round. And one can work back this sequential logic all the way to round 1.
But in actual play, both in the laboratory and the real world, players seem to ignore this logic and achieve the benefits of mutual cooperation. What may seem at first sight to be irrational behavior—departing from one’s dominant strategy—turns out to be a good choice, so long as everyone else is similarly “irrational.”
This is not to say that game theory is irrelevant, of course.
It’s a fundamental discipline for a website like this one -which is all about providing strategies and approaches to succeed at life-.
But in my opinion, it means that, ultimately, psychology comes first when it comes to succeeding with humans.
The authors quip a little later about the “danger of bargaining with those who haven’t read our book”.
And to me, no, it just shows the limitations of game theory in real life :).
Sometimes Game Theory Can Be Too Stifling To Come Up With Creative Solutions
For example, take the “game of chicken” of two men driving their cars towards each other.
The options are only swerving or not swerving IF you remain locked in the simplistic game theory approach.
But there is also slowing down, or even stopping in the middle of the track.
In extreme cases one may even ride with an inflatable suit and jump out of the car.
Or a wealthy man may run with a spider car and have an ejecting seat mounted just for winning that game.
These solutions come to mind only once you abandon the game theory approach.
The Art of Strategy is a fantastic book on game theory.
I found many of the social strategies and thinking patterns that we teach in Power University.
To me, the only limitation is that some of these concepts can be too abstract for people to apply in their daily social life.
In a way, Power University translates more mathematical and abstract concepts into more practical life strategies and techniques.
That being said, albeit more on the complex side for the larger audience, this was one of the best game theory books I’ve read so far.