Thinking Strategically by Avinash Dixit - Download as PDF File .pdf), Text File . txt) or read online. This course aims to help you think strategically, and then translate these thoughts .. exposition, see musicmarkup.info∼bobm/papers/musicmarkup.info † .. The reading is adapted from Barry Nalebuff and Avinash Dixit's Thinking Strategically. Thinking strategically by Avinash K. Dixit, Barry J. Nalebuff, April , W. W. Norton & Company edition, in English.
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Thinking Strategically. The Competitive Edge in Business,. Politics, and Everyday Life. Avinash K. Dixit and Barry J. Nalebuff. W. W. Norton & Company. The Competitive Edge in Business, Politics, and Everyday Life Praise for Thinking Strategically “Machiavelli is brought up-to-date in this book by Dixit and . Editorial Reviews. From Publishers Weekly. Most books on game theory either focus on The problem is, of course that if Dixit and Nalebuff can improve your strategic IQ, they can improve your competitor's as well—and the Japanese rights .
Dumbarton Selasa, 13 Mei [Y Dixit, Barry J. Nalebuff, from basic to difficult one will be a very useful works that you can take to change your life. It will not offer you unfavorable statement unless you do not get the definition. This is undoubtedly to do in reading an e-book to conquer the meaning. Nalebuff is reviewed considering that you really like this kind of e-book.
Competition I. Nalebuff, Barry, —. D59 All of us must practice strategic thinking at work as well as at home. Businessmen and corporations must use good competitive strategies to survive. Politicians have to devise campaign strategies to get elected, and legislative strategies to implement their visions. Football coaches plan strategies for the players to execute on the field. Parents trying to elicit good behavior from children must become amateur strategists the children are the pros.
Good strategic thinking in such numerous diverse contexts remains an art. But its foundations consist of some simple basic principles—an emerging science of strategy. Our premise in writing this book is that readers from a variety of backgrounds and occupations can become better strategists if they know these principles. The science of strategic thinking is called game theory. This is a relatively young science—less than fifty years old.
It has already provided many useful insights for practical strategists. But, like all sciences, it has become shrouded in j argon and mathematics. These are essential research tools, but they prevent all but the specialists from understanding the basic ideas. We have attempted a translation of many important insights for the intelligent general reader. We have replaced theoretical arguments with illustrative examples and case studies. We have removed all the mathematics and most of the j argon.
The book should be accessible to all readers who are willing to follow a little bit of arithmetic, charts, and tables.
Many books have already attempted to develop ideas of strategic thinking for particular applications. In fact, Schelling pioneered a lot of game theory in the process of applying it to nuclear conflict. Steven Brams has written several books, the most notable being Game Theory and Politics. In this book we do not confine the ideas to any particular context.
Instead, we offer a very wide range of illustrations for each basic principle. Thus readers from many different backgrounds will all find something familiar here. They will also see how the same principles bear on strategies in less familiar circumstances; we hope this gives them a new perspective on many events in news as well as history.
We also draw on the shared experience of most American readers, with illustrations from, for example, literature, movies, and sports. Serious scientists may think this trivializes strategy, but we believe that familiar examples from movies and sports are a very effective vehicle for conveying the important ideas. We thank many students from these courses for their enthusiasm and ideas. Takashi Kanno and Yuichi Shimazu undertook the task of translating our words and ideas into Japanese; in the process, they improved the English version.
The idea of writing a book at a more popular level than that of a course text came from Hal Varian of the University of Michigan. He also gave us many useful ideas and comments on earlier drafts. Drake McFeely at W. Norton was an excellent if exacting editor. He made extraordinary efforts to fashion our academic writing into a lively text. If the book still retains some traces of its teaching origins, that is because we did not listen to all of his advice.
Many colleagues and friends read earlier drafts with care and gave us numerous detailed and excellent suggestions for improvement. We also want to give credit to those who have helped us find a title for this book. Hal Varian started us off with Thinking Strategically. Yale SOM students gave us many more choices. How should people behave in society? Our answer does not deal with ethics or etiquette. Nor do we aim to compete with philosophers, preachers, or even Emily Post.
Our theme, although less lofty, affects the lives of all of us j ust as much as do morality and manners. This book is about strategic behavior. All of us are strategists, whether we like it or not. It is better to be a good strategist than a bad one, and this book aims to help you improve your skills at discovering and using effective strategies. Work, even social life, is a constant stream of decisions. What career to follow, how to manage a business, whom to marry, how to bring up children, whether to run for president, are j ust some examples of such fateful choices.
The common element in these situations is that you do not act in a vacuum. Instead, you are surrounded by active decision-makers whose choices interact with yours. This interaction has an important effect on your thinking and actions. To illustrate the point, think of the difference between the decisions of a lumberj ack and those of a general. When the lumberj ack decides how to chop wood, he does not expect the wood to fight back; his environment is neutral. Like the general, you must recognize that your business rivals, prospective spouse, and even your child are intelligent and purposive people.
Their aims often conflict with yours, but they include some potential allies. Your own choice must allow for the conflict, and utilize the cooperation. Such interactive decisions are called strategic, and the plan of action appropriate to them is called a strategy. This book aims to help you think strategically, and then translate these thoughts into action. The branch of social science that studies strategic decision-making is called game theory.
The games in this theory range from chess to child-rearing, from tennis to takeovers, and from advertising to arms control. Playing these games requires many different kinds of skills. Basic skills, such as shooting ability in basketball, knowledge of precedents in law, or a blank face in poker, are one kind; strategic thinking is another.
Strategic thinking starts with your basic skills, and considers how best to use them. Knowing the law, you must decide the strategy for defending your client. Knowing how well your football team can pass or run, and how well the other team can defend against each choice, your decision as the coach is whether to pass or to run.
Sometimes, as in the case of superpowers contemplating an adventure that risks nuclear war, strategic thinking also means knowing when not to play. Our aim is to improve your strategy I. But we have not tried to provide a book of recipes for strategies.
We develop the ideas and principles of strategic thinking; to apply them to a specific situation you face and to find the right choice there, you will have to do some more work. This is because the specifics of each situation are likely to differ in some significant aspects, and any general prescriptions for action we might give could be misleading. In each situation, you will have to pull together principles of good strategy we have discussed, and also other principles from other considerations.
You must combine them and, where they conflict with each other, evaluate the relative strengths of the different arguments. We do not promise to solve every question you might have.
The science of game theory is far from being complete, and in some ways strategic thinking remains an art. We do provide guidance for translating the ideas into action. Chapter 1 offers several examples showing how strategic issues arise in a variety of decisions. We point out some effective strategies, some less effective ones, and even some downright bad ones. The subsequent chapters proceed to build these examples into a system or a framework of thought.
In the later chapters, we take up several broad classes of strategic situations—brinkmanship, voting, incentives, and bargaining—where you can see the principles in action. The examples range from the familiar, trivial, or amusing—usually drawn from literature, sports, or movies—to the frightening—nuclear confrontation. The former are merely a nice and palatable vehicle for the game-theoretic ideas. As to the latter, at one point many readers would have thought the subj ect of nuclear war too horrible to permit rational analysis.
But as the cold war winds down and the world is generally perceived to be a safer place, we hope that the game-theoretic aspects of the arms race and the Cuban missile crisis can be examined for their strategic logic in some detachment from their emotional content.
The chapters are full of examples, but these serve primarily to develop or illustrate the particular principle being discussed, and many other details of reality that pertain to the example are set aside. Each case sets out a particular set of circumstances and invites you to apply the principles discussed in that chapter to find the right strategy for that situation. Some cases are open-ended; but that is also a feature of life.
As a result, market leaders will not follow the upstarts unless they also believe in the merits of their course. The Hot Hand Do athletes ever have a hot hand? Sporting commentators see these long streaks of consecutive successes and proclaim that the athlete has a hot hand. Yet according to psychology professors Thomas Gilovich, Robert Vallone, and the late Amos Tversky, this is a misperception of reality. They point out that if you ip a coin long enough, you will nd some very long series of consecutive heads.
The psychologists suspect that sporting commentators, short on insightful things to say, are just nding patterns in what amounts to a long series of coin tosses over a long playing season. They propose a more rigorous test. In basketball, they look at all the instances of a players baskets, and observe the percentage of times that players next shot is also a basket. A similar calculation is made for the shots immediately following misses.
They conducted this test on the Philadelphia 76ers basketball team.
The results contradicted the hot hand view. When a player made his last shot, he was less likely to make his next; when he missed his previous attempt, he was more likely to make his next. This was true even for Andrew Toney, a player with the reputation for being a streak shooter.
Does this mean we should be talking of the strobe hand, like the strobe light that alternates between on and off? Game theory suggests a different interpretation. While the statistical evidence denies the presence of streak shooting, it does not refute the possibility that a hot player might warm up the game in some other way. The difference between streak shooting and a hot hand arises because of the interaction between the offensive and the defensive strategies.
Suppose Andrew Toney does have a truly hot hand. Surely, the other side would start to crowd him. This could easily lower his shooting percentage. That is not all. When the defence focuses on Toney, one of his teammates is left unguarded and is more likely to shoot successfully.
In other words, Toneys hot hand leads to an improvement in the 76ers team performance, although there may be a deterioration in Toneys individual performance.
Thus, we might test for hot hands by looking for streaks in team success. Similar phenomena are observed in many other team sports. A brilliant runningback on a gridiron team improves its passing game and a great pass-receiver helps the running game, as the opposition is forced to allocate more of its defensive resources to guard the stars.
In the soccer World Cup nal, the Argentine star Diego Maradona did not score a goal, but his passes through a ring of West German defenders led to two Argentine goals. The value of a star cannot be assessed by looking only at his scoring performance; his contribution to his teammates performance is crucial, and assist statistics help measure this contribution. In ice hockey, assists and goals are given equal weight for ranking individual performance.
A player may even assist himself when one hot hand warms up the other. The Boston Celtics star, Larry Bird, preferred shooting with his right hand though his left hand was still better than most. The defence knew that Bird was right-handed, so they concentrated on defending against right-handed shots. But they did not do so exclusively, since Birds left-handed shots were too effective to be left unguarded.
What happens when Bird spends his off season working to improve his lefthanded shooting? The defence responds by spending more time covering his left-handed shots. The result is that this frees his right hand more often. A better left-handed shot results in a more effective right-handed shot. In this case not only does the left hand know what the right hand is doing, its helping it out.
It is also true that when the left hand is stronger it may even be used less often. Many of you will have experienced this seemingly strange phenomenon when playing tennis. If your backhand is much weaker than your forehand, your opponents will learn to play to your backhand. Eventually, as a result of all this backhand practice, your backhand will improve. As your two strokes become more equal, opponents can no longer exploit your weak backhand. You will play more evenly between forehands and backhands.
You get to use your better forehand more often; this could be the real advantage of improving your backhand. Go directly to gaol The conductor of an orchestra in the Soviet Union during the Stalin era was travelling by train to his next engagement and was looking over the score of the music he was to conduct that night. Two KGB ofcers saw what he was reading and, thinking that the musical notation was some secret code, arrested him as a spy. He protested that it was only Tchaikovskys Violin Concerto, but to no avail.
On the second day of his imprisonment, the interrogator walked in smugly and said, Youd better tell us all. We have caught your friend Tchaikovsky, and hes already talking. So begins one telling of the Prisoners Dilemma, perhaps the best known strategic game.
Suppose the KGB has actually arrested someone whose only offence is that he is called Tchaikovsky, and are separately subjecting him to the same kind of interrogation. If the two innocents withstand this treatment, each will be sentenced to 3 years imprisonment. If the conductor makes a false confession that implicates the unknown collaborator, while Tchaikovsky holds out, then the conductor will get away with 1 year and the KGBs gratitude , while Tchaikovsky gets the harsh sentence of 25 years for his recalcitrance.
Of course, the tables will be turned if the conductor stands rm while Tchaikovsky gives in and implicates him. If both confess, then both will receive the standard sentence of 10 years.
Now consider the conductors thinking.
He knows that Tchaikovsky is either confessing or holding out. If Tchaikovsky confesses, the conductor gets 25 years by holding out and 10 years by confessing, so it is better for him to confess.
If Tchaikovsky holds out, the conductor gets 3 years if he holds out, and only 1 if he confesses; again it is better for him to confess.
Thus, confession is clearly the conductors best action. In a separate cell in Dzerzhinsky Square, Tchaikovsky is doing a similar mental calculation and reaching the same conclusion.
The result, of course, is that both of them confess. Later, when they meet in the Gulag Archipelago, they compare stories and realize that theyve been had. If theyd both stood rm, theyd both have got away with much shorter sentences. If only theyd had an opportunity to meet and talk things over before they were interrogated, they could have agreed that neither would give in. But they are quick to realize that at in all probability such an agreement would not have done much good.
Once they were separated and the interrogations began, each persons private incentive to get a better deal by doublecrossing the other would have been quite powerful. Once again they would have met in the Gulag, there perhaps to settle the score of the betrayals not of the concerto. Can the two achieve enough mutual credibility to reach their jointly preferred solution? Many people, rms, and even nations have been gored on the horns of the Prisoners Dilemma. Look at the life-or-death issue of nuclear arms control.
For an exposition, see www. The answer was Ten years. What did you do? No, there must be some mistake. The sentence for that is only three years. Disarming yourself while the other remains armed was the worst prospect. Therefore no matter what the other side did, each preferred to stay armed.
But they could join in agreeing that the outcome in which both disarm is better than the one in which both are armed. The problem is the interdependence of decisions: the jointly preferred outcome arises when each chooses its individually worse strategy. Could the jointly preferred outcome be achieved, given each sides clear incentive to break the agreement and to arm itself secretly? In this case it needed a fundamental change in Soviet thinking to get the world started on the road to nuclear disarmament.
For ones comfort, safety, or even life itself, one needs to know the ways to get out of the Prisoners Dilemma. And there are ways. The story of the Prisoners Dilemma also carries a useful general point: most economic, political, or social games are different from games such as football or poker.
Football, poker, and tug-o-war are zero-sum games: one persons gain is another persons loss. But in the Prisoners Dilemma there are possibilities for mutual advantage as well as conict of interest; both prisoners prefer the no-confession result to its opposite. Similarly, in employer-union bargaining, there is an opposition of interests in that one side prefers low wages and the other high ones, but there is agreement that a breakdown of negotiations leading to a strike could be more damaging for both sides.
In fact such situations are the rule rather than the exception. Any useful analysis of games should be able to handle a mixture of conict and concurrence of interests. We usually refer to the players in a game as opponents, but you should remember that on occasion, strategy makes strange bedfellows.
Here I stand When the Catholic Church demanded that Martin Luther repudiate his attack on the authority of popes and councils, he refused to recant: I will not recant anything, for to go against conscience is neither right nor safe.
Nor would he compromise: Here I stand, I cannot do otherwise. Luthers intransigence was based on the divinity of his positions. When dening what was right, there was no room for compromise. His rmness had profound long-term consequences; his attacks led to the Protestant Reformation and substantially altered the medival Catholic Church. As his biographer Don Cook expressed it, [De Gaulle] could create power for himself with nothing but his own rectitude, intelligence, personality and sense of destiny.
But above all his was the power of intransigence. During the Second World War, as the self-proclaimed leader in exile of a defeated and occupied nation, he held his own with Roosevelt and Churchill. In the s, his presidential Non! In what way did his intransigence give him power in bargaining? The Wartburg, East Germanys domestically produced car, was jokingly referred to as The Luther: apparently it could be equally immobile.
For example, he single-handedly kept Britain out of the European Economic Community, once in and again in ; the other countries were forced either to accept de Gaulles veto or to break up the EEC. De Gaulle judged his position carefully to ensure that it would be accepted. But that often left the larger and unfair division of the spoils to France.
De Gaulles intransigence denied the other party an opportunity to come back with a counteroffer that was acceptable. In practice, this is easier said than done, for two kinds of reasons.
The rst kind stems from the fact that bargaining usually involves considerations beside the pie on todays table. The perception that you have been excessively greedy may make others less willing to negotiate with you in the future. Or, next time they may be rmer bargainers as they try to recapture some of their perceived losses. On a personal level, an unfair win may spoil business relations, or even personal relations. Indeed, biographer David Schoenbrun faulted de Gaulles chauvinism: In human relations, those who do not love are rarely loved: those who will not be friends end up by having none.
De Gaulles rejection of friendship thus hurt France. A compromise in the short term may prove a better strategy over the long haul. The second kind of problem lies in achieving the necessary degree of intransigence.
Luther and de Gaulle achieved this through their personalities. But this entails a cost. An inexible personality is not something you can just turn on and off. Although being inexible can sometimes wear down an opponent and force him to make concessions, it can equally well allow small losses to grow into major disasters. Ferdinand de Lesseps was a mildly competent engineer with extraordinary vision and determination. He is famous for building the Suez Canal in what seemed almost impossible conditions.
He did not recognize the impossible and thereby accomplished it. Later, he tried using the same technique to build the Panama Canal.
It ended in disaster. The problem for de Lesseps was that his inexible personality could not admit defeat even when the battle was lost.
How can one achieve selective inexibility? Although there is no ideal solution, there are various means by which commitment can be achieved and sustained. Belling the cat In the childrens story about belling the cat, the mice decide that life would be much safer if the cat were stuck with a bell around its neck. The problem is, who will risk his life to bell the cat?
This is a problem for both mice and men. How can relatively small armies of occupying powers or tyrants control very large populations for long periods? Why is a planeload of people powerless before a single hijacker with a gun? In both cases, a simultaneous move by the masses stands a very good chance of success.
But the communication and coordination required for such action is difcult, and the oppressors, The Suez Canal is a sea-level passage. The digging was relatively easy since the land was already lowlying and desert.
Panama involved much higher elevations, lakes along the way, and dense jungle. Lesseps attempt to dig down to sea level failed. Much later, the U. Army Corps of Engineers succeeded using a very different method a sequence of locks, using the lakes along the way. When the people must act individually and hope that the momentum will build up, the question arises, Who is going to be the rst?
Such a leader will pay a very high cost possibly his life. His reward may be posthumous glory or gratitude. There are people who are moved by considerations of duty or honour, but most nd the costs exceed the benets. 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: Thats what I did, too.
In a sense, we have seen these examples before. They are just a Prisoners Dilemma with more than two people; one might call this the hostages dilemma. Here we want to use this dilemma to make a different point namely, the frequent superiority of punishment over reward.
The dictator might keep the populace peaceful by providing it material and even spiritual comforts, but this can be a very costly proposition. Oppression and terror relying on the Hostages Dilemma can be a much cheaper alternative. There are many examples of this principle.
In a large taxi eet, cars are often assigned to drivers by a dispatcher. The eet has some good cars and some clunkers, The dispatcher can use his assignment power to extract a small bribe from each of the drivers. Any driver who refuses to pay is sure to get a clunker, while those who cooperate are given the luck of the draw from the remainder. If the drivers acted in collusion, they probably could stop this practice. The problem lies in getting the movement organized.
The point is not so much that the dispatcher can reward those who bribe him, but that he can punish severely those who dont. A similar story can be told about evicting tenants from rent-controlled apartments. If someone downloads such a building in New York, she has the right to evict one tenant so as to be able to live in her own building.
But this translates into a power to clear the whole. A new landlord can try the following argument with the tenant in Apartment 1A: I have the right to live in my building. Therefore, I plan to evict you and move into your apartment.
This is a token amount in relation to the value of the rentcontrolled apartment although it still downloads a few subway tokens in New York. The landlord then offers the same deal to the tenant in 1B, and so on. The United Auto Workers have a similar advantage when they negotiate with the U. A strike against Ford alone puts it at particular disadvantage when General Motors and Chrysler continue to operate; therefore Ford is more likely to settle quickly on terms favorable to the Union.
Such a strike is also less costly to the Union as only one third of their members are out. After winning against Even if everyone pays, some drivers will end up with a clunker. But if the clunkers are randomly assigned, no driver faces a great chance of the bad draw.
In contrast, the rst driver who refuses to pay can expect to drive to the clunker quite regularly. The Japanese coal downloaders use similar tactics every year when downloading from Australian coal mines. In contrast, Japanese union incentives work the other way, since they are organized by company and have more prot sharing.
If the Toyota unions strike, their members incomes suffer along with Toyotas prots, and they gain nothing from the precedent effect.
We are not saying that any or all of these are good outcomes or desirable policies. In some cases there may be compelling arguments for trying to prevent the kinds of results we have described. But to do so effectively, one has to understand the mechanism by which the problem arose in the rst place namely, an accordion effect, where each fold pushes or pulls the next. This phenomenon arises again and again; but it can be countered.
The thin end of the wedge Most countries use tariffs, quotas, and other measures to restrict import competition and protect domestic industries. Such policies raise prices, and hurt all domestic users of the protected product. How is it that the gains to a few always get priority over the much larger aggregate losses to the many? The trick is to bring up the cases one at a time. First, 10, jobs in the shoe industry are at risk. To save them would cost a billion dollars to U. Then along comes the garment industry, the steel industry, the auto industry, and so on.
Before they know it, U. If they had foreseen the whole process, they might have thought the cost too high, and insisted that workers in each of these industries bear the risks of foreign trade just as they would have to bear any other economic risk. Decisions made case by case can lead to undesirable results overall. In fact, a sequence of majority votes can lead to an outcome that everyone regards as worse than the status quo.
These problems arise because myopic decision-makers fail to look ahead and see the whole picture. Look before you leap It is all too common for people to get themselves into situations that are difcult to get out of. Once you have a job in a particular city, it is expensive to resettle. Once you download a computer and learn its operating system, it becomes costly to learn another one and rewrite all your programs. Travellers who join the frequent-yer program of one airline thereby raise their cost of using another.
And, of course, a marriage is expensive to escape. The problem is that once you make such a commitment, your bargaining position is weakened.