We started the original preface with: “Strategic thinking is the art of outdoing an adversary, knowing that the adversary is trying to do the same to you.” To this we now add: It is also the art of finding ways to cooperate, even when others are motivated by self-interest, not benevolence.
It is the art of convincing others, and even yourself, to do what you say. It is the art of interpreting and revealing information. It is the art of putting yourself in others’ shoes so as to predict and influence what they will do. (Loc.93)
Why can’t we just rely on others to tell the truth? The answer is obvious: because it might be against their interests. (PG.236)
Strategic game players who possess any special information will try to conceal it if they will be hurt when other players find out the truth. And they will take actions that, when appropriately interpreted, reveal information that works favorably for them. They know that their actions, like their faces, leak information. They will choose actions that promote favorable leakage; such strategies are called signaling. They will act in ways that reduce or eliminate unfavorable leakage; this is signal jamming. It typically consists of mimicking something that is appropriate under different circumstances than the ones at hand. (Pg.239)
If you want to elicit information from someone else, you should set up a situation where that person would find it optimal to take one action if the information was of one kind, and another action if it was of another kind; action (or inaction) then reveals the information.* This strategy is called screening.
When a law firm recruits summer interns with lavish hospitality, it is saying, “You will be well treated here, because we value you highly. You can believe us because if we valued you less then we would not find it in our interest to spend so much money on you.” In turn, the interns should realize that it doesn’t matter if the food is bad or the entertainment bores them stiff; what’s important is the price.
Many colleges are criticized by their alumni for teaching things that proved of no use in their subsequent careers. But such criticism leaves out the signaling value of education. Skills needed to succeed in particular firms and specialized lines of work are often best learned on the job. What employers cannot easily observe but really need to know is a prospective employee’s general ability to think and learn. A good degree from a good college acts as a signal of such ability. The graduate is in effect saying, “If I were less able, would I have graduated Princeton with honors?”
The same principle holds when someone is trying to convey rather than conceal information: Actions speak louder than words. To be an effective signal, an action should be incapable of being mimicked by a rational liar: it must be unprofitable when the truth differs from what you want to convey.2 Your personal characteristics—ability, preferences, intentions—constitute the most important information that you have and others lack. They cannot observe these things, but you can take actions that credibly signal the information to them. Likewise, they will attempt to infer your characteristics from your actions. Once you become aware of this, you will start seeing signals everywhere and will scrutinize your own actions for their signal content. (Pg.239)
But such signaling can turn into a rat race. If the more able get only a little more education, the less able might find it profitable to do likewise, be mistaken for the more able, and be given better jobs and wages. Then the truly more able must get even more education to distinguish themselves. Pretty soon, simple clerical jobs require master’s degrees. True abilities remain unchanged; the only people to benefit from the excessive investment in education for signaling are we college professors. Individual workers or firms can do nothing about this wasteful competition; a public policy solution is needed. (Pg.240)
Businessmen and corporations must develop good competitive strategies to survive, and find cooperative opportunities to grow the pie. Politicians have to devise campaign strategies to get elected and legislative strategies to implement their visions. Football coaches plan strategies for players to execute on the field. Parents trying to elicit good behavior from children must become amateur strategists—the children are 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, namely game theory. Our premise is that readers from a variety of backgrounds and occupations can become better strategists if they know these principles.
Some people question how we can apply logic and science to a world where people act irrationally. It turns out that there is often method to the madness. Indeed, some of the most exciting new insights have come from recent advances in behavioral game theory, which incorporates human psychology and biases into the mix and thus adds a social element to the theory. As a result, game theory now does a much better job dealing with people as they are, rather than as we might like them to be. (Loc.104)
The inevitable truth about gambling is that one person’s gain must be another person’s loss. Thus it is especially important to evaluate a gamble from the other side’s perspective before accepting. If they are willing to gamble, they expect to win, which means they expect you to lose. Someone must be wrong, but who? (Pg.409)
One of our colleagues decided to go to a Jackson Browne concert at Saratoga Springs. He was one of the first to arrive and scouted the area for the best place to sit. It had rained recently and the area in front of the stage was all muddy. Our colleague settled on the front row closest to the stage yet still behind the muddied area. Where did he go wrong?
No, the mistake wasn’t in picking Jackson Browne. His 1972 hit song “Doctor My Eyes” is still a classic. The mistake was in not looking ahead. As the crowd arrived, the lawn filled up until there was nowhere behind him left to sit. At that point, latecomers ventured into the muddied region. Of course nobody wanted to sit down there. So they stood. Our colleague’s view was completely blocked and his blanket equally darkened by the masses of muddied feet.
Here’s a case where look forward and reason backward would have made all the difference. The trick is to not choose the best place to sit independently of what others are doing. You have to anticipate where the late arrivals are going to go, and based on this prediction, choose what you anticipate will be the best seat. As the Great Gretzky said in another context, you have to skate to where the puck will be, not where it is. (Pg.411)
The strategic insight is to recognize that unlike the United Way, Las Vegas casinos are not in the business to give out money. In their search for the favorable machines, the majority of the players can’t be right. For if the majority of the people were able to figure it out, the casino would discontinue their offer rather than lose money. So, don’t wait in line. You can bet that the most heavily played machines are not the ones with the highest payback. (Pg.441)
WE&P by EZorrilla.