How's my Luck now?

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

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Location: India

Sunday, November 06, 2005

'Thinking Strategically' - II

Now for a description of the book and its contents, which go beyond business alone (as reflected in the sub-title). What follows may not be immediately comprehensible to readers not familiar with game theory, because I have summarized the contents of the book in brief, and as such, the concepts are taken out of their context and shorn of detail.

The book is divided into three parts. The first part deals with the most basic concepts of game theory: dominant strategies, dominated strategies, Nash equilibrium; first, in sequential games and then, in simultaneous games. These concepts help in 'anticipating your rival's response', and 'seeing through your rival's strategy'.

The second part deals with more advanced concepts. The famous 'prisoner's dilemma' is introduced and its solution by mutual co-operation of players is explored. Related concepts like detection of cheating, desirable characteristics of punishment and tit-for-tat strategies are discussed. The chapter on strategic moves deals with moves that 'are designed to alter the beliefs and actions of others in a direction favourable to oneself'. In this context, unconditional moves and conditional moves (threats and promises) are explored. A related concept is that of credible commitments. In order to make a strategic move credible to your competitors, you must make a commitment which might leave you with less options than before, but makes your path ahead clearer. This chapter shows eight ways to achieve credibility (by use of reputation; contracts; cutting off communications; burning bridges behind you; leaving the outcome to chance; moving in small steps; teamwork; use of mandated negotiating agents). In case of games where there is no dominant strategy, and no Nash equilibrium, players have to used mixed strategies (random or unpredictable strategies). Just how unpredictable each player should be and how moves should be mixed up is the subject of another chapter.

The third part has chapters dealing with very specific topics in game theory. The chapter on brinkmanship defines it as: 'the deliberate creation of a recognizable risk, a risk that one does not completely control; the tactic of deliberately letting the situation get somewhat out of hand, just because being out of hand may be intolerable to the other party and force his accommodation'. The most common example of brinkmanship is in nuclear deterrence. The next chapter deals with situations in which Adam Smith's 'invisible hand' of self-interest fails to achieve common good. Thus, it deals with implications for public policy in such situations where some things don't have a set price. The chapter on voting strategies deals with the limitations of majority rule in deciding outcomes, less common voting schemes like 'approval voting', etc. The chapter on bargaining, a short one, deals with how 'looking forward and reasoning backward' applies to bargaining, application of brinkmanship to bargaining, etc. Finally, the chapter on incentives deals with how to construct incentive schemes to motivate a worker to give off his best effort; and to ensure truthfulness and efficient outcomes in case of joint venture contracts and sealed-bid auctions.

The book ends with a chapter which only has case studies - puzzles solvable by applying the concepts introduced in the book.

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