Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life

"Well, as I mentioned, I studied philosophy, politics, and economics, which is quite a common degree course for people who have no idea what they plan to do with their lives. I assumed I would drop economics and that philosophy and politics would be the things that would interest me. But, actually, economics slowly but surely got more and more intriguing. At first, it was easy rather than interesting. It was just maths problems that I didn’t find very difficult. Then, later, I started encountering ideas that I found genuinely fascinating. Dixit and Nalebuff’s book Thinking Strategically is full of them. It’s all about game theory and its practical, everyday applications. What game theory is is an attempt to try to represent competition and cooperation in a proper, formal analytic way. There’s the idea that people may be lying to you and that you can’t trust everybody. People may tie their own hands to improve their bargaining position—like Odysseus tying himself to the mast so, even though he could hear the Sirens singing, he couldn’t dive into the sea and swim towards them and his doom. “Game theory is an attempt to try to represent competition and cooperation in a proper, formal analytic way” It’s about bargaining or coordination problems—say where you’re trying to meet somebody. You don’t know exactly where to meet them. You haven’t got your phone with you. Where is the right place? You’ve arranged to meet them somewhere in town at noon. Where do you go? Where might they go? You’re thinking, too, what they might want. Game theory is full of surprising results and little paradoxes and things that you don’t, at first, appreciate about the world. All these very, very rich ideas in social science were originally expressed mathematically by John von Neumann, a great mathematician who also helped to invent the computer and the atomic bomb. He started by trying to analyse poker: “Real life consists of bluffing, of little tactics of deception, of asking yourself what is the other man going to think I mean to do. And that is what games are about in my theory.” Dixit and Nalebuff have basically taken this set of ideas, stripped away a lot of the mathematics—but kept a little bit—and illustrated it with everything from competition policy cases to sports decisions on the tennis court or yachting races. They really just brought it alive. I had the privilege, recently, of interviewing Garry Kasparov, the chess grandmaster—perhaps the greatest chess player ever to grace the world stage. (It was terrifying, by the way, to meet him.) We were talking about how he would prepare exhaustively for games with ‘novelties.’ When someone is playing a well-understood line of moves, a novelty is something that no one has ever tried before, but turns out to be a really good counterattack. Kasparov was famous for having this enormous database of novelties that he wouldn’t reveal to anybody. He’d memorised them all. He was explaining why that was useful. You would think, ‘Well, that’s useful because you can spring out one of these surprise moves and beat people at their strongest game.’ In fact, the main effect of the novelties was that people wouldn’t play their strongest game. They’d be thinking, ‘If I play this line of attack that I always play, Kasparov will have an answer, so I will have to do some other thing that I’m not nearly as familiar with. I’m not as comfortable with it, but at least I won’t have to deal with a Kasparov novelty.’ That’s a classic piece of game theory. This preparation that Kasparov did was very, very powerful—even though he never used it. It was just the knowledge that it was probably there that had an impact on the game. That can all be expressed in game theoretic terms. Equally, let’s say Rafael Nadal has an absolutely fantastic backhand, which I suspect he does. How does he make his backhand more effective and win more points on his backhand? The answer is to improve his forehand. If he improves his forehand, people won’t be so happy to hit to his forehand. They’ll hit more to his backhand and that means he gets to use his backhand more often. It’s that kind of analysis. No, you don’t need to mathematize it at all. I once heard somebody say, ‘The best argument for studying game theory is if you have a conversation with someone who has never studied any game theory and you realise the basic mistakes they are making in thinking about the world.’ Game theory can get very, very technical and very abstract and at certain points you start to go, ‘Well, I’m not sure this highly abstract representation of the world is really telling us anything.’ That’s what I like about Dixit and Nalebuff: they have a little bit of maths, but not a lot and, basically, the way they communicate is through these nice, simple examples. The definition they have in mind of ‘strategic’ is not necessarily the same as most people’s. By ‘strategic,’ they mean taking into account the incentives and likely moves of the other person. That’s what an economist typically means by strategic interaction. If I’m trying to figure out how to bet in a game of roulette, that’s a decision problem. It’s not a strategic problem because the roulette wheel isn’t counter-strategizing. In poker, it is a strategic problem because there are other people and I have to think about what they might do in certain circumstances. I have to think about confusing them and not becoming too predictable myself. Get the weekly Five Books newsletter There are all these strategic considerations. Strategy can be completely competitive—it could be about enemies. But strategic considerations also apply when you’re trying to coordinate with people. It may be silly, but a classic example is when you’re going out on a date with somebody and you both agree that you’d like to go out, but you differ about exactly where you’d prefer to go. Would you like to go to a restaurant or would you like to go to the movies? That’s a strategic interaction as well."