Visualizing Strategy

Thinking Strategically – Book Review ͟͠͞͞ Thinking Strategically – Book Review Thinking Strategically by Avinash K. Dixit and Barry J. Nalebuff, subtitled “The Competitive Edge in Business, Politics, and Everyday Life,” Thinking Strategically is an international bestseller and a classic, having been published in 1993. My motivation to read it was because I saw this book listed on numerous forums which listed excellent business books. The book is organized into three parts, with a total of thirteen chapters. After reading the preface (with the moniker: “Thinking Strategically—Don’t Compete Without It”), the authors explain in the Introduction that the aim of the book is to improve the reader’s “strategy I.Q” while not promising to “solve every question you might have.” The first chapter sets an excellent tone for the rest of this book; this chapter profiles ten interesting “tales” of strategy. The book leads off with the phenomenon of the “hot hand,” commonly observed by sports fans and sports analysts. In fact, hot hands in such sports as basketball are actually a fallacy, most likely observed because we (humans) have a tendency to focus on streaks of occurrence rather than non-occurrence… In the first chapter, the authors also explain so-called zero-sum games: one person’s gain is another person’s loss (basketball, football, poker all fit this description). So what isn’t a zero-sum game? The most inviting example is that of the prisoner’s dilemma, where the payoffs of the two participants do not necessarily offset. In part II of the book, the authors have a lengthy chapter entitled “Resolving the Prisoner’s Dilemma” in which they elucidate a few excellent examples (they use OPEC to build the case). The authors explain that participants of a prisoner’s dilemma may try to achieve cooperation, but that there is a large underlying incentive to cheat even if an agreement is made. The examples in this book are interesting. For example, in Chapter 2 (“Anticipating Your Rival’s Response”), the authors feature the recurring theme in the cartoon strip Peanuts, in which Lucy holds the football and invites Charlie Brown to run up to the ball and kick it. Of course, we all know Lucy’s intentions, but it’s worthwhile to create a decision tree and deduce what Charlie Brown should do (the authors do admit that the story of Charlie Brown is “absurdly simple,” but that this example allows the reader to become familiar with decision trees for more complex situations). Another example in this chapter is the game of chess, in which the players try to envision how their opponent will play a few moves into the future. I found it interesting that the authors pondered about solving chess, something I wrote about when I linked to the Garry Kasparov article, “The Chess and the Computer.” Wali Memon 1

Thinking Strategically – Book Review ͟͠͞͞In the chapter “Strategic Moves,” you’ll learn about unconditional moves (an example of aTV race between United States and Japan is presented), threats and promises (while anunconditional move gives a strategic advantage to a player able to seize the initiative andmove first, you can establish a similar strategic advantage through a response rule—eithera threat or a promise), warnings and assurances (a warning is when it is in your interest tocarry out a threat while an assurance is when it is in your interest to carry out a promise).Other chapters in the book include “Credible Commitments” (in which you will learn about“apparent irrationality,” contracts, and why it would make sense to burn bridges),“Unpredictability” (in which you will learn about the min-max theorem and the usefulnessof surprising others by surprising yourself), “Brinkmanship” (please note that“brinksmanship” is not a word), “Cooperation and Coordination” (with a most interestingcase about stock markets and beauty contests: how do they relate?),”The Strategy ofVoting” (with considerations about median voting, the so-called “naive voter,” and how itmay occasionally behoove to vote for an enemy to see a result you desire), “Bargaining”(with a discussion of handicap system in negotiations), and “Incentives” (an excellentchapter which sets the case for merit-based bonuses in jobs).I think the best part of this book is the number of examples and the cases at the end of thechapter which reinforce the ideas discussed. Each case has a thorough solution, and so youcan definitely learn a lot by reading through these cases. Speaking of cases, the last chapterof the book is entirely devoted to them; there are a total of twenty-three additional cases togo through which further reinforce the concepts covered in the book (again, solutions tothe cases are also provided).QuotesSome interesting quotes from the book follow.Setting the tone for the book:You must recognize that your business rivals, prospective spouse, and even your child areintelligent and purposive people. Their aims often conflict with yours, but they include somepotential allies. Your own choice must allow for the conflict, and utilize the cooperation. Suchinteractive decisions are called strategic, and the plan of action appropriate to them is calleda strategy. This book aims to help you think strategically, and then translate these thoughtsinto action. Wali Memon 2

Thinking Strategically – Book Review ͟͠͞͞On threats and promises:Is never advantageous to allow others to threaten you. You could always do what they wantedyou to do without the threat. The fact that they can make you worse off if you do notcooperate cannot help, because it limits your available options. But this maxim applies only toallowing threats alone. If the other side can make both promises and threats, then you canboth be better off.How do I know this book is dated? Reference to the Cold War on page 3 of the book:As the cold war winds won and the world is generally perceived to be a safer place, we hopethat the game-theoretic aspects of the arms race and the Cuban missile crisis can be examinedfor their strategic logic in some detachment from their emotional content.On De Gaulle’s rejection of friendship:A compromise in the short term may prove a better strategy over the long haul.On Khrushchev’s silence:Khrushchev first denounced Stalin’s purges at the Soviet Communist Party’s 20th Congress.After his dramatic speech, someone in the audience shouted out, asking what Khrushchev hadbeen doing at the time. Khrushchev responded by asking the questioner to please stand up andidentify himself. The audience remained silent. Khrushchev replied: “That is what I did, too.”On rules of the game: Wali Memon 3

Thinking Strategically – Book Review ͟͠͞͞There are two general features of bargaining that we must first take into account. We have toknow who gets to make an offer to whom, i.e., the rules of the game. And then we have toknow what happens if the parties fail to reach an agreement.On taking risks (this conclusion follows after a case study of the 1984 Orange Bowl gamebetween the Nebraska Cornhuskers and the Miami Hurricanes):If you have to take some risks, it is often better to do this as quickly as possible. This is obviousto those who play tennis: everyone knows to take risks on the first serve and hit the secondserve more cautiously.An explanation of a dominant strategy with a baseball analogy (situation: one or moreplayers on base, there are two outs in the inning, and a batter is facing a 3-2 count):We say that running on the pitch is the dominant strategy in this situation; it is better in someeventualities, and not worse in any. In general, a player has a dominant strategy when he hasone course of action that outperforms all others no matter what the other players do. If aplayer has such a strategy, his decision becomes very simple; he can choose the dominantstrategy without worrying about the rival’s moves.What is the dominance in a “dominant strategy”?The dominance in “dominant strategy” is a dominance of one of your strategies over yourother strategies, not of you over your opponent. A dominant strategy is one that makes aplayer better off than he would be if he used any other strategy, no matter what strategy theopponent uses.Another revelation of the age of this book: Wali Memon 4

Thinking Strategically – Book Review ͟͠͞͞As we write this, the Iraqi invasion of Kuwait has shot the price of oil up to $35 per barrel andexperts are divided about the future of OPEC.On an interesting police tactic:Police have been known to scare drug dealers into confessing by threatening to release them.The threat is that if they are released, their supplies will assume they have squealed.How to deter cheating with punishment (you have to read the book to find out the problemwith the approach listed below; alternatively, respond with your thoughts in the comments,and I will make note of the correct response):Next we ask how severe a punishment should be. Most people’s instinctive feeling is that itshould “fit the crime.” But that may not be big enough to deter cheating. The surest way todeter cheating is to make the punishment as big as possible. Since the punishment threatsucceeds in sustaining cooperation, it should not matter how dire it is. The fear keepseveryone from defecting, hence the breakdown never actually occurs and its cost isirrelevant.Threats and promises versus warnings and assurances:Threats and promises are truly strategic moves, whereas warnings and assurances play moreof an informational role. Warnings or assurances do not change your response rule in order toinfluence another party. Instead, you are simply informing them of how you will want torespond based on their actions. In stark contrast, the sole purpose of a threat or promise is tochange your response rule away from what will be best when the time comes. This is done notto inform but to manipulate. Because threats and promises indicate that you will act againstyour own interest, there is an issue of credibility. After others have moved, you have anincentive to break your threat or promise. A commitment is needed to ensure credibility. Wali Memon 5

Thinking Strategically – Book Review ͟͠͞͞On burning bridges:Armies often achieve commitment by denying themselves an opportunity to retreat. Thisstrategy goes back at least to 1066, when William the Conqueror’s invading army burned itsown ships, thus making an unconditional commitment to fight rather than retreat.On the element of surprise:If you choose a definite course of action, and the enemy discovers what you are going to do, hewill adapt his course of action to your maximum disadvantage. You want to surprise him; thesurest way to do so is to surprise yourself. You should keep the options open as long aspossible, and at the last moment choose between them by an unpredictable and thereforeespionage-proof device.The essence of brinkmanshipThe essence of brinkmanship is the deliberate creation of risk. This risk should be sufficientlyintolerable to your opponent to induce him to eliminate the risk by following your wishes. Thismakes brinkmanship a strategic move. Like any strategic move, it aims to influence the other’saction by altering his expectations. [Question for the reader: is brinkmanship a threat?]On inferior technologies:Our greater experience with gasoline engines, QWERTY keyboards, and light-water nuclearreactors may lock us in to continued used of these inferior technologies.Final ThoughtsMost books on strategy and game theory can be dry and/or inaccessible to the generalreader with overwhelming mathematics. This book is excellent (and interesting to read)because it has an amazing diversity of illustrative examples drawn from politicalcampaigns, corporate relations, sports, OPEC, the military draft, the Cuban Missile Crisis, Wali Memon 6

Thinking Strategically – Book Review ͟͠͞͞the Cold War (especially the Cold War, if I may so myself), speed limits, and otherinteresting topics. The book is mostly self-contained but it does require multiple sittings togo through it (I spent over a week reading this book), especially if you’re careful to gothrough the cases and work through some of the solutions to verify the authors’ findings.Do keep in mind that this book was published in 1993, so some of the topics are dated.Nevertheless, if you’re at all interested in strategy, game theory, and are comfortable withbasic mathematical concepts, this book is definitely worth a read. Wali Memon 7

Visualizing Strategy

by Wali Memon on Aug 11, 2012

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