The Art of Strategy — A Game Theorist’s Guide to Success in Business and Life : Book Review
Having read Strategy Book “The Art of Strategy — A Game Theorist’s Guide to Success in Business and Life” challenge lies ahead in putting into actions what I have comprehended. Intension of this article is to put forward my perception of the book.
Game!, through out my childhood a game is something which I played with my friends in order to have fun and spend time joyfully. While playing games there was sense of competitiveness, an urge to win each and every time. Any game we played, each one of the participants observed their competition and thought of their own moves, which would result in winning. We were formulating a plan or in other words strategising to win. Avinash K. Dixit, Professor of Economics at Princeton University, and Barry J. Nalebuff, Professor at Yale School of Management, say that every incident of life, be it social activity, relationships, or Business, is a game and can be converted into mathematical model to develop clear understanding of situations, and possible out comes anticipated to plan moves, which have higher probability of desired outcome. So, in line with professors, a tantrum of a child to get what it wants, can be deduced as its tactics and effort of a child to excel in studies to get that gift promised by its parents as its strategy.
Branch of social science that studies strategic decision making is called “Game Theory”, this is more of an art and way to improve one’s skill at this art is by seeing how it has been done before in similar situations. Authors take the readers through “Ten Tales of Strategy” to set the stage.
#1. Pick a number: A usual thought process to guess a picked number is to use “Binary search algorithm”, especially one, who is guessing is from programming background. Game would start with $100 prize money and reduce $20 for each wrong guess. It makes sense for the game host not to have picked numbers 1, 12, 13, 25, 37, 38, 50, 75, 87, 88 or 100 and further a smart person would think that the above numbers are obvious choices and resort to guess numbers 99, 49, 24, 74, so on, it is up to the game host to pick a number by thinking on how the guesser would think!
#2. Wining by Loosing: Recent state elections in Karnataka led to hung house, Second best party INC and third best party JDS formed a coalition government. Single largest party BJP who were short by less than ten seats, plan to influence the voters by depicting the failure of Karnataka’s coalition government to win lok sabha election. BJP is trying to implement “Winning by Loosing” strategy.
#3. The Hot Hand: Authors emphasise that a key player who ups his game ends up resulting in victory of their representative team. Have, witnessed both side of this coin. For years Sachin Tendulkar has been clear “Hot Hand” for Indian Cricket Team, but once opponents get rid of him the match use to be done and dusted. On the contrary SriLanka’s Jayasurya and Kaluwitharana’s aggressive strategy upped their teams performance. Opponents planned to get rid the openers but often fell short to counter more elegant batsman in form of Aravinda de silva, Roshan Mahanama or Arjuna Ranatunga who followed. With luck favouring the SriLankan team, went on to win 1996 Word cup, but never have been same there after.
#4. To Lead or Not To Lead: Dilemma of one who is in front is to look back to try not leave others pass in front, by copying the underdog’s strategy. This usually leads to failure, leading examples being Onida -neighbor’s envy owner’s pride or Nokia.
#5. Here I Stand: A rigid stand by one might provide a higher bargaining power, but can make or break the deal. A compromise in the short term may prove a better strategy over the long haul. Real deal in this game is to have “Selective Inflexibility”.
#6. Thinking Strategically : Many a times putting oneself in a do-or-die situation brings out the best. Hernán Cortés who led an expedition with just six hundred soldiers, that caused the fall of the Aztec Empire is a good example.
#7. Buffett’s Dilemma : Many would perceive Brilliance of Buffetts’s strategic thinking as crafty. Way to get people to do something that is against their interest, is to put them in what is known as prisoners’ dilemma. When offer of one billion dollar is made to party which defeats a bill, which is not acceptable to any of the legislators, will end up passed unopposed just to avoid billion dollar ending up on either side.
#8. Mix Your Plays: Strategically having a standard repetitive thinking is being predictable and equivalent to nailing ones own coffin.
#9. Never give a Sucker an even bet: Never get lured by offers which are too good to believe. In any deal each party thinks they will gain, one has to be wrong, that’s the nature of zero-sum game. Both sides can’t gain.
#10. Game theory can be dangerous to your health: One might be thinking of playing a game, but this can be part of larger game in which they are not an equal player.
Authors write about few of the strategies starting with Looking forward and backward reasoning. Along with support of historical data, Looking forward and backward reasoning helps to come up with strategically beneficial decisions. Tool that will be useful to looking forward is Decision trees. Decision tree helps in systematically thinking of options and possible outcomes, further sub-branching, until no options are available. This brings in clarity and one, gains the understanding of backward reasoning leading to beneficial decision making.
Prisoners Dilemma is prevalent in current day scenario, Consider home appliance vendors in Bangalore. Pai International, Girias, Croma and many more. Until, all have standard pricing, sales get distributed more or less equally. With profit margin varying from 40% to 70%, there is option for any one of the vendors to reduce their prizes and attract more customers into their outlet, there by hitting on sales of other vendors. Others have an option to reduce further to regain their lost customers, this sort of price war ends up with all the vendors making bleak profits. On the other hand if all of these vendor come to understanding on standard pricing every one makes fat profits and only segment which suffers, would be the customer segment. Several examples are provided in the book for better understanding of Looking Forward and Backward reasoning and Prisoners Dilemma.
A beautiful equilibrium is about Nash equilibrium, which is a set of strategies, one for each player, such that no player has incentive to change his or her strategy given what the other players are doing. Nash equilibrium is a law that no one would want to break even in the absence of an effective police force. Consider that all the home appliance vendors are in agreement on pricing and if by chance one of the vendor cheats, association of vendors evaluate the credibility of the change in price and if found guilty can punish the cheating vendor. There might be unavoidable scenarios, where under selling was for valid reason, in which case the cheating vendor may be pardoned.
After introducing to strategies, Authors emphasise these strategy in action, although the examples are sometimes somewhat hypothetical. Authors also introduce randomness called as “mixed strategies”.
Finally, Authors have covered applications of game theory in the real world, including auctions, bargaining and voting. Best Alternative to a Negotiated Agreement (BATNA) gives negotiators bandwidth to strike a deal.Players must determine their pay off relative to the BATNA, and must convince their opponents that the BATNA is as good as possible. Applications of game theory in the various auctions cases, and the formation of price fixing cartels are the most compelling part of this book.
