Book review: Thinking Strategically

One of my favourite parts of teaching ECONS101 each year is teaching game theory. Probably the biggest disappointment is that we can only devote one week to it (in fact, when we made the switch from ECON100 to ECONS101, I toyed with the idea of trying to get two weeks of game theory into the paper, but it just wouldn't work). There are just so many cool applications of game theory that we simply do not have time to fit into the paper. That problem was reinforced as I was reading Thinking Strategically, by Avinash Dixit and Barry Nalebuff.

The book was written in 1991, and while the specific applications are dated, the underlying game theoretic concepts are timeless. Dixit and Nalebuff do an excellent job of explaining some relatively complex ideas in a way that is relatively easy to understand. And even better, they do it without going deep into the mathematics of game theory. And that's important - my feeling is that the best ideas in game theory can be understood intuitively and without disguising the intuition behind an impenetrable wall of equations.

The applications that Dixit and Nalebuff employ range widely across business, politics, and society, from serving strategy in tennis to incentivising soldiers in the military to organising a joint venture between firms. Not all of the applications have solutions or implications that are obvious at first glance. I particularly appreciated this application:

If you are going to fail, you might as well fail at a difficult task. Failure causes others to downgrade their expectations of you in the future. Failure to climb Mt. Everest is considerably less damning than failure to finish a 10K race. The point is that when other people's perception of your ability matters, it might be better for you to do things that increase your chance of failing in order to reduce its consequence. People who apply to Harvard instead of the local college, and ask the most popular student for a prom date instead of a more realistic prospect, are following such strategies...

Psychologists see this behavior in other contexts. Some individuals are afraid to recognize the limits of their own ability. In these cases they take actions that increase the chance of failure in order to avoid facing their ability. For example, a marginal student may not study for a test so that if he fails, the failure can be blamed on his lack of studying rather than intrinsic ability.

That is quite insightful, and not immediately obvious. I also liked an explanation for how retailers could use low price guarantees to raise prices.

I made a bunch of notes that I will use in teaching ECONS101 this trimester (which starts in a little over a week). I could easily have made a bunch more notes, if only there was more space in the paper for game theory! Dixit and Nalebuff have other follow-up books, which I am now looking forward to reading (including The Art of Strategy, which I have on my bookshelf already).

I'm not the only one who really enjoyed Thinking Strategically. Earlier this month, Tim Harford listed it in his list of the best books ever published in the history of the universe. I wouldn't go quite that far, but I am happy to recommend it to readers interested in game theory or strategy.