More on game theory

The death of John Nash with his wife Alicia in a car accident is a sad, sad end to a remarkable life. The story of Nash’s genius, madness and recovery is well known thanks to the movie based on Sylvia Nasar’s wonderful biography, . There have been many obituaries and appreciations. This VoxEU column is an excellent outline of why Nash’s work was so important for economics.** John Cassidy has a nice New Yorker column. is certainly worth a go – there are pdfs of the introductory material on the Princeton University Press website – and there is plenty of material on the Nobel prize website.

[amazon_image id=”0691095272″ link=”true” target=”_blank” size=”medium” ]The Essential John Nash[/amazon_image]   [amazon_image id=”0571212921″ link=”true” target=”_blank” size=”medium” ]A Beautiful Mind[/amazon_image]

For more on game theory, one very enjoyable historical perspective – looking too at other uses of mathematics in economics – is Paul Strathern’s . It starts with John Von Neumann (giving the impression that Peter Sellers as Dr Strangelove only slightly overacted the role), and Morgenstern ad Von Neumann’s and ends with John Nash. Interestingly, Strathern focuses on the difference between co-operative and non-cooperative games rather than zero and non-zero sum. As for the uses of game theory in life, rather than just economics, my favourite book is Dixit and Nalebuff’s – it has a website where you can read an excerpt.

Step one in using game theory in life is just to think about how other people will react to your actions – something so easy to say, yet so rarely done.*  And how paradoxical that something that seems like common sense had its roots in unusually tortured genius.

[amazon_image id=”0140299866″ link=”true” target=”_blank” size=”medium” ]Dr. Strangelove’s Game: A Brief History of Economic Genius[/amazon_image]  [amazon_image id=”0691130612″ link=”true” target=”_blank” size=”medium” ]Theory of Games and Economic Behavior (Princeton Classic Editions)[/amazon_image]  [amazon_image id=”0393337170″ link=”true” target=”_blank” size=”medium” ]The Art of Strategy: A Game Theorist’s Guide to Success in Business and Life[/amazon_image]

Dr Strangelove, an atypical economist

Dr Strangelove, an atypical economist

*I remember once saying to a room full of policy economists that figuring out the Nash equilibrium in the context of a decision different EU governments were making at the same time meant our policy advice was a no-brainer; not all of them got the point.

** Update for econ anoraks: Note the nice description here of Nash’s bargaining solution as a Possibility Theorem, published at the same time Arrow developed his Impossibility Theorem. I think it’s the unrestricted domain axiom that makes the difference.

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To infinity, and beyond

Brad Stone’s  is a rattling good read, and it should be on everybody’s reading list. The raw material is a gift to a storyteller of course. Jeff Bezos is clearly an extraordinary character, Amazon an extraordinary company, and the period since the dawn of the internet an extraordinary era. Stone has covered the company for many years and the account here is authoritative.

[amazon_image id=”059307047X” link=”true” target=”_blank” size=”medium” ]The Everything Store: Jeff Bezos and the Age of Amazon[/amazon_image]

The book is particularly good on the distinctive dynamics of online businesses, and the consequences for the various strategic calls Amazon has had to make. For example, when a solitary analyst at Lehmans, Ravi Suria, started to write negative reports in 2000 about Amazon’s then-low or negative margins, it risked becoming a self-fulfilling prophecy because financial viability depended on suppliers not demanding faster payment, and on customers having the confidence to continue flocking to the website. I hadn’t really appreciated before Amazon’s negative working capital requirement as customers pay for goods faster than suppliers need to be paid for them.

There are descriptions of moves straight out of the playbook of  by Carl Shapiro and Hal Varian (although this book, one of my all-time favourites, isn’t referenced), such as super saver delivery – free for people who don’t mind waiting longer – and also Clay Christensen’s  Amazon has set up some new areas of business as skunkworks, but in other cases Jeff Bezos simply drove through new activities that would cannibalize existing sales. One example is the introduction of Marketplace, putting other retailers on the same page as Amazon itself.

[amazon_image id=”087584863X” link=”true” target=”_blank” size=”medium” ]Information Rules: A Strategic Guide to the Network Economy[/amazon_image]

The corporate culture sounds awful; I’d never work there. Amazon has become a nasty competitor as it has grown – and the book has an interesting section on its entanglements with competition authorities over e-books. It raises some questions too about the company’s business methods in dealing with both suppliers and smaller competitors – undercutting pricing in nappies, apparently to induce an online diaper supplier to sell out to Amazon; the use of grey markets in high quality goods to get a better price, thereby undermining the viability of the supplier. All, though, in the interests of delivering Amazon customers “everyday low pricing”, a desirable aim but one that simply conflicts with some other desirable aims such as sustaining craft production. This is an unfinished story, as the long term will one day catch up with the short term.

The other big question, not explicitly raised but obvious, is what a post-Jeff Bezos Amazon will be like. That’s no doubt many years away but his driven personality and vision have shaped the company. Succession in these digital giants is clearly a big issue.

All in all, a terrific book for thinking through some of the dilemmas the online world presents, and for thinking about the digital challenge to existing business models. The Jeff Bezos story is amazing too, and by the way he wants to colonise space. That’s not a joke.

Highly recommended book, whether for pleasure or for business students.

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Jane Austen: a better game theorist than a novelist

Here is a confession, one that will surely rank for unpopularity with my post about how much I dislike the Kindle. I really dislike Jane Austen’s novels. This is only partly because they were force-fed to me at school, along with Charles Dickens and Thomas Hardy, other unfavourite authors of mine. It’s also because who cares about who gets married to whom? I could never be bothered, and indeed the novels have all merged into one general pink romantic mush in my memory. Give me Eliot or Gissing or Zola or Hugo.

There, confession made. So it was with some trepidation that I started reading Michael Chwe’s , despite the absolutely glowing reviews it’s been receiving (see for example these articles in the New York Times and The Washington Monthly). My Austen-antipathy notwithstanding, I thought it very good indeed. The early and later chapters are superb, giving other literary examples such as Shakespeare and African-American folktales, and one can easily extract the argument from the Austen-focused chapters in the middle while skipping details about the various tedious marriage plots.

[amazon_image id=”0691155763″ link=”true” target=”_blank” size=”medium” ]Jane Austen, Game Theorist[/amazon_image]

The book hits several targets. It demystifies game theory, explaining it as a systematic way of thinking about strategic behaviour; that is, about choosing actions based on thinking through other people’s likely reactions. It defends game theory against the (silly but all-too-common) accusation that people don’t behave rationally and game theory is therefore a tool of neo-liberal economic imperialism. The first part of this assertion is obviously true, but – as the book demonstrates – strategic thinking is a useful tool long pre-dating modern neoclassical economics. Indeed, one of Chwe’s other aims is to support his argument that Jane Austen was explicitly writing about the difference between people who think strategically and those who don’t.

The most interesting part of the book for me was about why, indeed, there are people who do not strategise – about ‘cluelessness’, as he names it, borrowing from the movie. For instance, Chwe points out that in folk tales as in Austen, high-status people are often ‘clueless’ and therefore easily tricked by subordinates whom they cannot imagine think more strategically than they do. He finds five explanations in the Austen novels:

– some people aren’t naturally adept at it, and it’s harder work for the brain than not being strategic

– sometimes the social or cultural distance is too great for people to think through the likely reaction of another (Chwe gives another example of this in the context of US army checkpoints in Iraq)

– some people are too self-focused and assume others are just like themselves

– the fourth reason is status: to admit that a lower status person can strategise, or to strategise about them as an equal, is actually to undermine one’s superior status

– finally, some people assume they don’t need to think about another person’s preferences because they can change them

The book also adds some supplementary explanations for ‘cluelessness’. For example, he argues that the status-related reason is self-reinforcing because naturally clueless people will gravitate towards status-oriented situations, the hierarchy removing the need to be strategic about others. “In other words, stereotypically ‘male’ organizations like the military might be more hierarchical and status-oriented, with each person given an explicit rank, not because men love hierarchy but because their relative cluelessness requires that every social interaction have explicitly defined roles and rules.”

Another reason for adopting overtly ‘clueless behaviour’ is that it can be a good commitment device – for instance, if two cars are approaching head-on, the driver who does worry about the other’s reaction will be the one who gives way, while the one who fails to make eye contact will sail on. Chwe also suggests that thinking strategically involves empathy towards others, which some social superiors will want to avoid (eg. antebellum slaveowners), or involves actually envisioning being in their bodies to understand how they might think or feel. Interestingly, he also points out that a failure to be strategic is often linked with characteristics often found in autistic people, such as literal-mindedness, and a weak ‘theory of mind’.

All of these reasons ring very true – it has often amazed me how unstrategic most people are, especially in business. It is harder, a bit, to think about how other people will react to your actions and choices, but not that hard. should join the list of strategic classics like , or the good how-to game theory guides like Dixit and Nalebuff’s , on the shelf of everybody who wants to be effective in life.

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The other squeezed middle

It’s been a busy week of dawn to dusk meetings, but I did manage to finish Jack Rakove’s  on election night (before going to sleep, secure in my eldest son’s confidence in Nate Silver). For a British reader like me, this bit of history is unfamiliar – I can’t imagine why, but it tends to be glossed over in the curriculum in our schools. However, even for American readers, the approach is probably quite fresh – not strictly chronological but thematic essays, each of which uses some key characters as the narrative driver. And for anybody, of course, it’s interesting to consider the dysfunctionality of modern American politics in the light of this foundational period.

Consider, for example, this passage:

“To be a political moderate during this final crisis [1776] meant something more than holding a middle ground between radicals like the Adamses and future turncoats like Joseph Galloway [who he?]. Moderation did not mean keeping an open mind about rival claims or seeking to balance clashing points of view. Nor were moderates the 18th century version of undecided voters, unsure of their own views or trimming their sails to any passing political breeze. Moderation is better considered as a political position in its own right …. the moderate political leaders … did possess a distinct set of attitudes.”

Surely this is just as true of today’s ‘disenfranchised’ middle? Of course, the 18th century moderates got squeezed out by events that fed extreme views. That’s the trouble with turbulent times.

I was also very struck by the sections on George Washington and the advantage he gained from thinking strategically – that is, more than one move ahead – especially when pitted against wishful thinking on the other side. As noted in my recent post, (Strategic) thinking is hard to do, this is a vanishingly rare skill, so obviously something that our human nature doesn’t equip us for. In contrast to wishful thinking – for a prize example of which, see Jon Stewart on the Fox News coverage on Tuesday night.

[amazon_image id=”0099551861″ link=”true” target=”_blank” size=”medium” ]Revolutionaries: Inventing an American Nation[/amazon_image]

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(Strategic) thinking is hard to do

I’m taking a break from economics by reading  by Jack Rakove, a history of the American revolution told through the debates among its leaders. The gaps in my knowledge on this subject are large, and it’s a beautifully written book, so I’m enjoying it. It has made me realise, once again, how few people think strategically at all – that is, think about how their interlocutor is going to react in his (or her) next move – never mind what their end-game might be. The American victory over Britain could almost be summed up as the result of having a few more strategists.

[amazon_image id=”0099551861″ link=”true” target=”_blank” size=”medium” ]Revolutionaries: Inventing an American Nation[/amazon_image]

This is just as true in modern life. The best business book on strategy is, at least in my reading, Nalebuff and Dixit, . It uses game theory but isn’t all that difficult. Still, just as Daniel Kahneman points out in , how hard it is to calculate anything, I’m sure it must also be hard to strategise.

[amazon_image id=”0393310353″ link=”true” target=”_blank” size=”medium” ]Thinking Strategically: Competitive Edge in Business, Politics and Everyday Life[/amazon_image]

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