How's my Luck now?

Reflections, views and descriptions during my stay at IIM Lucknow from July 2004 to March 2006

Location: India

Sunday, November 06, 2005

'Thinking Strategically' - I

I took a month to finish this fabulous book by Professors Avinash Dixit and Barry Nalebuff (W. W. Norton & Co., 1991). The book's sub-title is: 'The competitive edge in business, politics, and everyday life'. It deals with 'strategic interactions' that individuals and organizations experience in their everyday life from the perspective of game theory.

The book is basically a very informal and example-laden introduction to game theory and its applications. The numerous examples are stylized versions of situations found in sports, politics, business, and other social relationships. The premise of the book is that every person must behave 'strategically', by which is meant that in making any decision or undertaking any action, one must be rational oneself, as well as assume that one's competitor(s) will behave rationally too. In the book's words: 'strategic thinking is the art of outdoing an adversary, knowing that the adversary is trying to do the same to you'. Thus, game theory becomes a theory of competition (the reason we study it in the ATSC course). The book succeeds in capturing the reader's attention throughout by its lucid language and interesting and entertaining examples.

The importance of game theory lies in its wide range of applications, a fact which is corroborated by the awarding of the Nobel Prize in Economics to pioneering game theorists (John Nash, as well as this year's winners, Aumann and Tom Schelling).

However, game theory alone cannot function as a theory of business strategy and competition. It is a theory of social interaction, and has applications in business strategy, but isn't the be-all and end-all of it. One notable criticism is that adopting only a game-theoretic view of dealing with competition may make an organization fail to develop any fundamental source of competitive advantage, spending all its time only in moves and counter-moves to competitive behaviour; in other words, too many tactics, too little strategy. Another is that competitive situations in real life (in business or otherwise) are seldom so simple that all outcomes are known with exact payoffs for each competitor. Lack of information or incorrect information can break down many of the techniques. As for its social applications, the game-theoretic assumption of mutual rationality is far-fetched, as most of us have experienced. One doesn't need to deal with a lunatic or a brainwashed terrorist or an egoistic dictator to realize this. Most of us make decisions on an emotional or non-rational basis every day.


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