I recently read Thinking Strategically: The Competitive Edge in Business, Politics and Everyday Life by Avinash K. Dixit and Barry J. Nalebuff. I found Thinking Strategically to be an excellent book on Game Theory. There were a great many eye-opening real life examples of Game Theory. I found Dixit’s and Nalebuff’s explanation of everyday occurrences through the lens of Game Theory fascinating.
Among the most interesting parts of the book were:
- Game Theorists should look ahead and reason back when trying to solve problems.
- The Law of Increasing Opaqueness holds that collusion focuses on the more transparent dimensions of choice, and competition shifts to the less observable ones.
- There is no solution that achieves reciprocal cooperation in a one-time game. Only in an ongoing relationship is there an ability to punish, and thus a stick to motivate cooperation. A collapse of cooperation carries an automatic cost in the form of a loss of future profits. If this cost is large enough, cheating will be deterred and cooperation sustained.
- Retailers’ promises to refund over 100% of a price difference if a competing merchant sells an item at a lower price might sound highly competitive. However, the excessively high bounty offered acts a deterrent from merchants lowering prices below those of their competitors and is therefore anti-competitive.
- It may initially seem that companies offering their best customers “most-favored-customer” status (whereby the seller offers these favored customers the best prices they offer to anyone) is a great idea. However, since manufacturers cannot offer discounts to new customers without reducing their margins on sales to their largest customers, they will not reduce their prices which is deemed to be anti-competitive.
- In some instances, when management of company feared a takeover, they tried to destroy some of their company’s value. However, for the scorched earth strategy to be effective, you must destroy what the invader wants, which may not coincide with what the present occupants value.
- Sometimes it is wise to destroy the credibility of one’s promise. For instance, when a government promises not to attack hijackers, but does so, this destruction of the credibility of a promise makes credible the threat never to negotiate. Also, when the government offers amnesty to people who have not paid their taxes, many citizens will believe that they don’t have to pay their taxes since the government will offer another amnesty. However, if the government cheats on its amnesty, the destruction of its credibility will enable to government the credibly commit not to offer an amnesty again.
- Failure causes others to downgrade their expectations of you in the future. Thus, if you are going to fail, you might as well fail at a difficult task. It might be better to do things that increase the chances of failing in order to reduce its consequences. For instance, if a job candidate said that he failed to matriculate at Harvard, the potential employer may entirely discount that failure. The real question should be did he even have a chance of getting admitted? If not, why did he apply there? Why didn’t he apply to schools where he had a realistic chance of getting admitted?
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