Transcript
Brett McKay:
Brett McKay here and welcome to another edition of the Art of Manliness Podcast. Whether you’re a businessman, a statesman, a general or a parent, you’re strategizing on a daily basis. So how can you do it better? Well, my guest today will provide some insights. His name is Barry Nalebuff. He’s a game theory expert and the author of the book, The Art of Strategy: A Game Theorist Guide to Success in Business and Life. And on the show today, Barry and I discuss how game theory can help you make better strategic decisions in all sorts of situations. For example, we explore why threatening to punish your child’s sibling for bad behavior might be a more effective strategy than threatening to punish the child himself. I know that sounds Machiavellian, but we’ll explain the reasoning behind that. We’ll discuss what Donald Trump can teach us about the promise and perils of injecting randomness into your strategy.
We also talk about how you can employ game theory against yourself to lose weight or even quit smoking. After the show’s over, check out the show notes at aom.is/gametheory. Barry Nalebuff, welcome to the show.
Barry Nalebuff:
Thanks for inviting me.
Brett McKay:
So you’re the co-author of a book called The Art of Strategy. It’s about strategic thinking, particularly game theory. It’s a topic I’ve long been interested in. But before we get into the specifics of game theory, what it is, let’s talk about strategy broadly. How do you and your co-author define strategic thinking in your book? I mean, what is strategy really?
Barry Nalebuff:
Strategy is different from decision making. And the reason is that there are other people’s decisions that end up mattering. So when a lumberjack cuts down a tree or an engineer builds a bridge, that bridge isn’t responding, isn’t thinking. The tree isn’t a strategic player. But when you make decisions in the real world, the success of your actions depends on how other people will respond. And so that interactive aspect of the decision making is what makes for strategy and game theory.
Brett McKay:
Okay. I mean, I can understand why business people or military strategists need to understand strategic thinking or game theory, but why is it important for even lay people? Just people who are mom and dads, husbands, wives, and why is it important for them to understand strategy?
Barry Nalebuff:
I think everyone is interacting with decisions you make. Certainly kids, whether or not they want to eat something or not eat something or stay up late or how one divides up chores in a household, people are interacting with each other and you don’t make decisions in a vacuum. In physics, they say that for every action, there’s a reaction equal and opposite, but in game theory, that reaction can be changed and can be influenced. And since we don’t act in isolation, we better figure out how other people are going to respond to what we’re doing.
Brett McKay:
Right. But the thing is, I think strategy has a PR problem, right? Ever since ancient Greeks, Odysseus was the wily one and his strategic thinking was often looked down upon as sort of unmanly or wily. And we think of strategy, we think of Machiavelli and being manipulative. Is that what strategy is or can strategy turn into that or can strategy actually be benevolent?
Barry Nalebuff:
Well, another one of my books co-authored with Adam Brandenburg is called Co-opetition, and it’s about competing and cooperating at the same time. And so you need to understand strategy for how to compete more effectively, but you also need to understand it for how to cooperate more effectively.
Brett McKay:
Okay. So let’s get into what makes up strategic thinking. You focus on game theory and I think a lot of people might have heard of game theory if they’ve seen A Beautiful Mind about John Nash. But what is game theory and what’s the history of its development?
Barry Nalebuff:
Sure. Game theory was started, created by a brilliant polymath at Princeton named John von Neumann. And of course, John Nash also at Princeton, less than a hundred years old. So it’s a relatively speaking, pretty new science. And initially it started out thinking about everything from how one would hide and find submarines in warfare to now anything from how to raise kids to bid in auctions to find smart compensation contracts for executives. I thought it might be worth playing a little game with you that could illustrate how to do this, what’s going on.
Brett McKay:
Well, maybe we can link to something, an online game that people can play online if they haven’t done it. Well, I mean, okay. So it started off primarily math driven, but as I read your book, it seems like game theory has developed in something more interdisciplinarian. Is that correct?
Barry Nalebuff:
Well, since political science, sociology, law, all of that requires thinking about interactions, it does actually cross many disciplines. Yes, indeed.
Brett McKay:
Yeah. It seems like a lot of behavioral science is influencing it, psychology as well, cognitive science.
Barry Nalebuff:
Well, remember, if you think that economics is supposed to be a social science as opposed to asocial, we’re supposed to understand how other people interact with us. And in that sense, you have to take them as they are, not as you wish they would be. And so in that sense, we don’t have a behavioral game theory for the simple reason that that would be redundant, that how other people behave is intrinsic and central to any discussion of game theory.
Brett McKay:
Okay. And I’m sure we’ll get into some games I’m sure people are familiar with, but let’s start getting to the nitty gritty here. So you start off saying in the book that the first step when you find yourself in a strategic game. So let’s talk, how do you know you’re in a strategic game? Is it just whenever there’s someone else or other people in a decision making process, is that a strategic game?
Barry Nalebuff:
If you’re acting with other people and they can react to what you’re doing or their actions influence your success, then you’re pretty much in a game. So to give you a couple recent public policy examples, much of the debate about the ACA or Obamacare actually is really a game theory discussion. So whether or not you require people to buy healthcare, well, if you don’t require healthy people to buy healthcare, then the only people who will end up buying it are those who have preexisting conditions who aren’t healthy. That means the premiums are going to have to be very high. That means that only the even sicker people will end up buying healthcare, which means the premiums will have to be higher still. And the end result is you’ll get what’s called a death spiral and nobody will end up being able to afford healthcare. And so the idea of understanding the interaction between who will buy and what the effective premium is would be a classic example of what George Aklof won a Nobel Prize for, something called The Market for Lemons.
Brett McKay:
And so I mean, games can get very complex or very simple. I mean, a simpler one would be just negotiating what time your child’s going to go to bed, right? That’s a very simple one, but the Obamacare instance, that’s very complex. There’s a lot of different people involved, a lot of different factors. So you say that whenever you find yourself in a strategic game, when there’s decisions being made that involve other people, the first thing to do is figure out what kind of game it is and it’s either simultaneous or sequential. What are the differences between the two and how will your strategy change based on what kind of game it is?
Barry Nalebuff:
So let me just go back for a second. I don’t think the game with your kid about bedtime is so simple because remember, it’s not just one night. This is a classic repeated game and you might decide that today it’s not worth fighting it, but you need to be tough to have a reputation because otherwise in the future, you won’t have any credibility. And so most games are neither simply sequential or simultaneous. There are mixtures of both. They’re not single shot. They go on again and again, so they’re repeated. In a sequential move game is much like checkers. I make a move, you make a move, I make a move and we alternate making moves. So when I’m making a move, I have to think about how you’re going to respond. When your response is taken into account, it’s thinking about what I’m going to do in response to your response and so on.
In contrast, a simultaneous move game doesn’t really require us to move at the exact same moment, but it means I have to make a move without knowing exactly what it is you’ve done at the time I’m making my decision. So a very simple example of that would be I am placing a bid in an auction and I’m bidding without knowing what your bid is. Another example could be quite soon, I’m voting. And when I place my vote, I don’t know what the other people have done in their voting booth. And so when I’m thinking about, do I want to support the candidate who I really like or make a protest vote? I don’t really know what other people’s decisions have been made at the same time.
Brett McKay:
So it sounds like with simultaneous games, there’s a lot more uncertainty with sequential games. There’s a bit more certainty than simultaneous.
Barry Nalebuff:
Exactly. No, again, just in voting, it’s not that we’re literally all voting at the exact same moment, but when I’m voting, since I don’t know what you’ve done, it’s as if we’re moving at the same time. And you’re absolutely right that in sequential move games is much, much easier to solve because I know everything in terms of what you’ve done.
Brett McKay:
Right. So with sequential games, you can look forward and start reasoning backwards, I think is what you say in the book.
Barry Nalebuff:
Exactly. So the nice thing about sequential move games is we know how to solve them. And essentially you can play out every possible scenario and you can figure out what is the best way of playing the game. And so that’s really easy to do in tic-tac-toe, which is why nobody plays tic-tac-toe once they’re above seven, because you can figure out going to the center means we’re always going to get a tie. In contrast, for a while it was thought that chess was too hard to solve or go was too hard to solve. And so even though in theory there was a optimal way of playing it, a way of guaranteeing either a victory, a tie or a tie, since nobody knew what that was, we could still enjoy playing the game. Pretty soon I’d say that that’s not going to be the case.
Brett McKay:
Right because computers will allow them to map out all the possible sequences.
Barry Nalebuff:
Right. I think the top six or seven best chess players in the world are all now computer programs.
Brett McKay:
That’s crazy. So I think we can all intuitively do this sequential forecasting, looking forward, reason backward when things are pretty simple, but some of these sequential games can get really complex. I mean, chess is a perfect example. There are millions upon millions of different sequences. So how do you, as a game theorist, track those sequences and then figure out which sequence will probably be the one that will play out in the real world?
Barry Nalebuff:
Well, when we didn’t have computers, you use heuristics. You say, I think that owning certain parts of the board, certain positions are stronger than others, certain pieces are worth more than other pieces in terms of power. And so you look for simple rules that are usually right, maybe they’re not always right. In other cases, you can do simulation. In other cases, you base this on experience. Depends a little bit on how important the game is and how often it’s going to be played in terms of how much you want to go and figure out how to solve it. A classic example though, sometimes failure to understand the right strategy occurs in sports where when teams are thinking about when it is to go for a two point play rather than a one point play after a touchdown, sometimes they fail to look forward and reason backward.
So if you’re down by two touchdowns with not that much time left to go and you score one touchdown and make the extra point, there are cases where the coach has then gone for the two point play on the second touchdown with just a few moments left to go so as to win rather than tie the game. And it turns out that that’s a fine strategy. You might argue it’s worth taking that risk, but if you though that’s what you’d want to do, then you should have gone for the two point play on the penultimate touchdown. The reason being that you have to make both a one point and a two point play. It doesn’t really matter which order you make them in, but if you miss the two point play on the first shot, then you have another chance to make a two point play on the second one and still get a tie.
Brett McKay:
Okay. That makes sense. I didn’t think about it that way. I’ve had those moments where my coach decided to go for it later on and we ended up losing. So it sounds like sequential games, are there any examples of real life examples of, I’m talking about parent to child or business to business where sequential games. It seems like the examples we’ve been talking about are very, they’re games, like literal games, tic-tac-toe, football, chess. Any examples where there’s less structure, but there’s still a sequential game involved?
Barry Nalebuff:
Well, I’d say if you think about appointing a Supreme Court nominee, the president goes and suggests a candidate. The Senate then in theory advises and confirms. And so sure, there are discussions and movements ahead of time, but essentially the Senate doesn’t get to… Well, they can try and change this and preempt it by saying, unless you pick X, we’re not going to accept anyone. But essentially the president moves first and then the Senate moves second. In other cases, Congress and the Senate will pass a bill and then the President decides whether to sign it or to veto it. And if vetoed, the Congress decides whether to override the veto. So it’s still obviously a simplification, but various laws have created a structure which puts some sequentiality into the moose.
Brett McKay:
But there’s still some simultaneous things going on. As you said earlier, game’s usually a mixture of the both, simultaneous and sequential.
Barry Nalebuff:
Absolutely. But I’d say in this case, there’s still a predominant aspect of sequentiality.
Brett McKay:
Okay. So let’s move into specific games that I think people might have heard or have experienced with that kind of highlights some insights into game theory. One of them I think a lot of people have heard of is the prisoner’s dilemma. For those who are familiar with it, can you briefly explain what the prisoner’s dilemma is and then what insights about game theory does it provide us?
Barry Nalebuff:
I think there’s a sense in which people think the prisoners dilemma and game theory are synonymous, which is unfortunate because game theory is a lot more than the prisoner’s dilemma. But to the extent that anybody has watched a crime thriller or the wonderful English TV show Golden Balls, what you have is a situation where both individuals, each individual has an incentive to cheat or to confess no matter what the other side does. So here you’re interviewing two prisoners in separate rooms. A crime has been committed. If neither prisoner confesses, then they both get off. But if one confesses while, or actually don’t quite get off, they get a light sentence. If one confesses while the other keeps mum, the one who confesses gets off and the other one gets a very tough sentence, while if they both confess, then they each get a medium sentence.
And so the idea is that if one side keeps mum, then I can get off by confessing. And if the other side confesses, then I really had better confess because otherwise I’m going to get a really severe sentence. And so since no matter what I think the other side is going to do, I have an incentive to confess, but of course when both confess, they’re both worse off than if neither one does. And this is this paradox because in some sense, when we each act in our individual interest, the end result is bad for us in a collective sense.
Brett McKay:
Right. And any instances where, I mean, the prisoners obviously happens whenever you’re separating the prisoners and trying to negotiate confessions, but any other real life examples where you see prisoners dilemmas act play out?
Barry Nalebuff:
Well, I think there’s the tragedy of the commons, which is a multi-person version of this. And so if you think about global warming or air pollution, it’s in my interest to not change my lifestyle, to continue driving cars or flying planes or to support industry. And each of us does this and the end result is that we end up with global warming and we’re all worse off. And so we need to somehow collectively agree to work and cut back carbon emissions as opposed to do this on an individual basis. Now, the advantage that we have here is that we can actually talk to each other and monitor what the other side is doing. So if we had to make these decisions in isolation and not do treaties, then we’d find ourselves in the multi-person version of prisoners dilemma and the result would be disastrous. And so the good thing is we don’t let prisoners talk to each other and make a pact, but we do let countries do that.
And that’s why we need to actually do it via treaties and alliances as opposed to counting on people acting in their own self-interest.
Brett McKay:
Right. So it sounds like if you find yourself in a prisoner’s dilemma situation is to open up communication. That’s how you avoid those scenarios.
Barry Nalebuff:
Exactly. And of course, sometimes the goal is to put other people in a prisoners dilemma and prevent them from being able to communicate. So you’ve hit on a key point, which is sometimes the best way to play a game is to change the game, that if the game isn’t working out for you, don’t accept it the way it is.
Brett McKay:
So what’s an example of changing the game so you can make things better?
Barry Nalebuff:
You can add more players to the game. You can say, okay, if in fact I discover that you snitched, when you discover I snitched and we go to prison, people will beat up snitches. And so it may look like it’s a good idea to do the confession, but actually the game isn’t over yet. And that we in fact want to make sure that there are other players who end up punishing us for doing the strategy that at the short run seems to be in our interest.
Brett McKay:
Okay. So extend the game, make it longer. Yeah. I mean, I guess that ties into you bring in the tit for tat approach that one game theorist developed back a couple of decades ago, one of these sort of prisoners dilemma type games where there was multiple prisoner dilemma games. So you would confess one time and the other guy would confess and then the other guy would know what you did and then he would retaliate for sticking it to you. And at the time they though that this tit-for-tat approach was a good way to solve the prisoner’s dilemma. But you argue in the book that it’s actually not that great of an approach.
Barry Nalebuff:
So it’s probably not the case that we’re going to play tit for tat with prisoners because they would have to be serious recidivists to be doing this tens or hundreds of times in a row. It’s more likely the prison dilemma exists when companies are trying to find ways to circumvent competition and to come up with say implicit, sometimes even explicit, collusion. So firms, let’s take airlines as a case, might want to keep prices high. And so the question is, I want to go and do a little bit of a price cut and steal some market share from you. And it may not be in my rival’s interest who has a larger fraction of that particular route or has more to lose by coming down and matching me. But if I understand that the person’s going to do that, they will do a tit-for-tat strategy and if I come down, they’re going to come down, then I don’t get the gain from doing any type of price cut.
They’re going to punish me and as a result, I will learn that this type of cheating, and cheating by the way here is in some sense cheating on the collusion, so it’s cheating on the cheating, if you want, doesn’t actually pay off. Now, the problem with simple mechanical responses to when you think somebody else is cheating is that every now and then you’re going to make a mistake and you’re going to think somebody cheated even when they didn’t. And so you’re going to punish them. And then what’s going to happen is they’re going to punish you for punishing them and then you’re going to punish them for punishing you for punishing them. And you’re going to get yourself into one of these spirals, perhaps a little bit like what we see in the Mid-East where it’s hard to even figure out who started it, but now we’re just in this endless cycle of retaliation and how do we ever get out of it?
Brett McKay:
Right. This interesting with the airline thing, I mean, there’s laws in place where companies can’t explicitly collude, right? They can’t get together in a sort of a cabal and say, “All right, here’s the price we’re going to set the tickets at so all of us can benefit from it.” So because they can’t do that, they have to do the sort of implicit collusion. Okay. Well, if you’re going to raise the price, I’ll raise the price. And it kind of evens out.
Barry Nalebuff:
Well, it’s a little bit of, I see my rival raise price. Now I can do two things. I can take advantage of that and get some extra share or I can match the price. And why I don’t want to match the price, I want to give my rival incentive to have taken this action and encourage them to keep the price high. And so even without talking to the other side, I can figure out that this might be in my long run interests. People have been talking about the effects of greater concentration in industry and that leading to higher profits and perhaps higher prices. But what often they’ve missed is something called common ownership. And two of my colleagues here, Florian Eder and Fiona Scott Morton, have been working on this. And one of the things they’ve discovered is that most companies, most competitors have the same owner.
So Vanguard or Fidelity own huge fractions of all the different airlines or all the different pharmaceutical companies. And when you own A and its rival, B, you say, “Well, wait a second. Guys, I don’t think this is such a good idea for you to go and keep on cutting prices to try and steal share from each other or adding capacity. Just lay off a little bit here.” And so essentially now we have to worry not just about firms colluding with each other, but the person who owns both of the firms, encouraging them to not really compete vigorously with each other.
Brett McKay:
So another type of game that you mentioned in the book that’s sort of a bit different from the prisoners dilemma is what you call a confidence game. What is a confidence game and how does it differ from a prisoner’s dilemma?
Barry Nalebuff:
I think Maria Konnikova has written a great book about this and she talks about how it is that con artists end up fooling people. And this is some wonderful applications of game theory. In particular, if you’re ever wondering why it is that spam that’s trying to get phishing exercises, trying to go and get you to send lots of money to Nigeria or someplace else are full of spelling errors. You say, “Well, okay guys, come on, run through a spell checker. I mean, how stupid you have to be?” And the answer is they don’t want to waste their time with people who aren’t gullible. And so they do things that are particularly bad because if in fact you can’t spot the super obvious nature of the spam, then that’s saying, “Okay, I’ve got a real stupid fish here and I’ve hooked a great one and I can go after this person.” Whereas if they find people who are particularly sophisticated, later on those folks will catch on and they will have wasted a lot of their time.
So it’s an interesting point that they make the letters intentionally simplistic, unrealistic, riddled with spelling errors because they’re trying to find the stupidest fish in the sea.
Brett McKay:
So it’s sort of like they’re signaling. They’re putting on a signal to find out the signals of their potential victims.
Barry Nalebuff:
Exactly. It’s the latter point that the key is that they’re looking for their victims to signal that they’re not paying attention, that they’re gullible. And if they don’t have spelling errors, then the other side can’t really signal their gullibility.
Brett McKay:
All right. So these spam guys from Nigeria, they’re pretty smart.
Barry Nalebuff:
They’re smart to act stupid.
Brett McKay:
Right, right. So let’s talk about, I think some that people might have heard before because of popular culture. I think a beautiful mind might have helped, but this idea of the Nash equilibrium, I’ve heard it before over and over and I never quite understood until I read your book. But for those who aren’t familiar, what is a Nash equilibrium in game theory? Does it happen in sequential games or does it happen in simultaneous games or both?
Barry Nalebuff:
The concept of a Nash equilibrium was developed to help us understand what will happen or a resting point in a simultaneous move game. And so the challenge is, what do we do in a world where I think that you think that I think and ad infinitum will happen? I don’t get to see what you’re doing, you don’t get to see what I’m doing. And so what move is it that I want to make in a world where I have to anticipate what you’re doing when you’re anticipating what I’m going to do? And that seems like it’s an infinitely recursive logic and it’s not clear how you ever cut through that knot. And so the brilliant insight of John Nash is, well, are there a set of strategies or moves such that if I’m doing A and you’re doing B, and I think you’re doing B, and I think you think I’m doing A, then I still actually want to do A.
So that is if you’ve correctly anticipated what I’m going to do and I’ve correctly anticipated what you’re going to do, neither of us wants to change what we’re doing. And that is an attractive candidate for how a game will be played when we can’t actually see what the other person has done.
Brett McKay:
So it sounds like the goal is to get to a Nash equilibrium when you’re strategizing.
Barry Nalebuff:
No. It is not a goal, in particular in the Prisoner Dilemma, the Nash equilibrium is that both confess, so that’s not a good outcome. If we want to predict how a game might be played, then a Nash equilibrium is a good starting place for what players might end up doing, but it is not necessarily desirable as an outcome.
Brett McKay:
Okay. So as you work through the Nash equilibrium or trying to figure out what the Nash equilibrium is, you’re going to find what you call dominant strategies in the mix. And then is that the thing you should take as the dominant strategy for you?
Barry Nalebuff:
Well, if there’s a dominant strategy, then life is easy because it says whatever I think the other person is doing doesn’t matter. It’s always the case that I want to do A. A is better than any other strategy. And so I don’t have to consider what the other person is doing. And so that allows me a real cheat out of this Gordian knot. The challenge, of course, is that there aren’t that many games where there really is a dominant strategy. And so we have to more often than not refer back to a national equilibrium to get a better sense of how we should play the game.
Brett McKay:
Okay. Well, so this idea when you’re strategizing, doing a simultaneous strategy, like you said, you’re doing this recursive thing in your head. I’m thinking A and I think my opponent or competitor’s thinking that I’m thinking A. And if he’s thinking that, then I’m going to do this. It sounds like it would be good to inject randomness, so you can throw people off.
Barry Nalebuff:
Well, again, it depends. Is my goal to coordinate with you or to get an advantage over you? So I’ll give you two versions of a simultaneous move game. Here’s one, you and I both have to pick a number. And if we pick the same number, then we both get that amount of money paid for by a third party. And that number, let’s say, has to be between one and 10. It’s an integer. So if we both pick four, we both get four. If we both pick five, we both get five. If you pick four and I pick six, we both get zero.
Brett McKay:
So yeah, we both pick 10 if we’re cooperating.
Barry Nalebuff:
Okay. Well, now you’ve ruined it because you gave me a sense of what is you’re going to do before we played the game.
Brett McKay:
Oh, okay. Darn it.
Barry Nalebuff:
But that’s okay. So one of the things this game illustrates is that there’s a lot of national equilibrium. If I’m going to pick six, what is it that you’re going to do in this game? What do you want to do?
Brett McKay:
Well, I’d pick six too, if I knew that.
Barry Nalebuff:
Exactly. Now you might say, okay, well six, six is not such a great outcome. We could both pick 10. I got it. But you have to be sufficiently confident that I’m going to pick 10 in order for you to pick 10. And in fact, this is a game where there’s multiple national equilibrium. You might decide, well, it’s not that hard to pick between them because isn’t it obvious that everyone should pick 10? Okay. But actually this game helps explain a lot of why we see some countries developing faster than others. So in much of the world there’s corruption and corruption creates problems with police, with doing business. And you can say, I think a world in which there’s no corruption is a better world, but if I think you’re going to be corrupt, then I have to be corrupt. And if you think I’m going to be corrupt, then you’re going to be corrupt.
And so in such a case, we end up both picking two if you’d like, and we each get two rather than 10 and 10. And so if you’re scared that I’m going to pick two, even if you want to pick 10 and you know I want to pick 10, if I’m scared that you think I’m scared, then you might pick two because you think I’m going to pick two. And we both know there’s a better answer, but neither of us has the confidence that we’re willing to go there.
Brett McKay:
Okay. Well, so that’s one example of a game. What’s another example? You said there was another example of a game.
Barry Nalebuff:
Well, so the other version is if we both pick different numbers, now we get a reward. Well, now it’s a little harder. What number do you pick between one and 10?
Brett McKay:
So how does it determine who gets the money? Is it the person who picks the highest?
Barry Nalebuff:
Well, it’s a third party who’s going to pay us money unless we hit a tie.
Brett McKay:
Okay. Yeah.
Barry Nalebuff:
And now you could think about this a little bit as commuting. If we both leave at the same time, there’s traffic. And is it, do I leave early and you leave late? Do you leave late and I leave early? How is it that we end up uncoordinating our behavior? And we both agree that we want to be uncoordinated, but it’s not quite so clear how it is we go about doing that.
Brett McKay:
Interesting. So I guess there would have to again be communication if you want to over –
Barry Nalebuff:
Well, if there was communication, then it’d be easy, just like when you said, “Hey, I’m going to pick 10.”
Brett McKay:
Right.
Barry Nalebuff:
But here, in other cases, if you don’t allow communication, then the idea of coordination or discoordination without communication is what becomes the challenge. So you might say, “Look, the best thing to do in that case is just pick any number at random between one and 10.” And that actually would be a nash equilibrium in this particular game.
Brett McKay:
Interesting. And I guess you highlight other examples where randomness would be the best approach you talk about in soccer, in the penalty kick situation where this kicker can either kick right or left and the goalkeeper has to decide whether he’s going to go right because he doesn’t have enough time to see where the ball’s going. He has to make that decision as soon as the guy kicks the ball. So I guess in the book you say that it’s in the interest of both the kicker and the goalkeeper just to randomize which way they’re going to go?
Barry Nalebuff:
Yeah. Well, if in fact either side could predict what the other side is going to do, then they’d have a big strategic advantage. If I know that you’re always going to kick to the right side, then I’m going to want to jump to the right side to try and prevent the shot. And of course, if you know that I’m jumping to the right side, then you’re going to want to kick to the left. So each side is trying to get a sense of what the other one is doing and this is this notion of being unpredictable. Now, what I find interesting in the current presidential election is that that discussion of whether or not you always want to keep people guessing is a strategy that Donald Trump talks about a lot. And sometimes it’s the right strategy and sometimes not. So if it’s the case that I’m thinking about doing a surprise military attack, yeah, then I don’t want people to know which day I’m going, where am I going to land at Dunkirk?
Am I going to land in Normandy? I don’t want the enemy to have a heads up in terms of where my troops are landing. On the other hand, if it’s something like, what will my response be if Russia attacks a NATO country or if China attacks Taiwan, I want the other side to know without any randomness that NATO will respond. And we don’t want people to be guessing in that case. We want to turn this into a sequential move game where they can imagine and know with great certainty rather than have to guess what the response is because if they think NATO is going to respond or US will respond to attack of Taiwan, then they won’t go and initiate the conflict.
Brett McKay:
So you have to strategize about your strategy.
Barry Nalebuff:
It’s an English expression, different horses for different courses. And that it’s not the case that playing a random strategy is always a good idea. Sometimes you want to keep the other side guessing what you’re going to do and other times, exactly the reverse. You want to make sure they don’t guess, that they know and can anticipate with precision how you will respond to any action.
Brett McKay:
Right. Another example you give I thought was interesting about randomness being effective is with parking tickets, right? So you randomly enforce who gets a parking ticket and then that kind of keeps people on the lookout. I better not do that because there’s a chance that I could get a ticket. But if people knew in advance, okay, if they were parking when they shouldn’t be parking, they knew they’d get a ticket or they knew there’s times when they wouldn’t get a ticket, they would just break the law all the time.
Barry Nalebuff:
Well, here’s the thing. If we said we’re only, think about enforcing parking tickets a lot like the IRS enforcing tax returns. And if we said we’re only going to audit people this year whose name begins with D, then 25 out of the 26 letters would say, okay, this is the year I can get away with cheating. And so instead you want to say, look, we don’t have the resources to audit every parked car or every tax exam, but what we’re going to do is keep you guessing as to which ones we’re going to look at. And if we find that you have made a mistake, then we’re not just going to ask you to pay the cost of the parking meter, the 50 cents that you would have put in. We’re actually going to stick you with a $25 fine. And if we find that you cheated on your tax returns, we’re not just going to ask you for the amount of money that you should have paid, we’re going to impose severe penalties on you.
And so we reduce the probability of getting caught, but we increase the penalties and we keep people guessing by picking a random audit or random enforcement strategy.
Brett McKay:
So I mean, how do you determine when a random strategy is best or when it’s not best? I mean, how do you sit down and think? You look at the situation, you have to decide, okay, should I inject some randomness here or maybe I should go make it a sequential game? How do you make that decision?
Barry Nalebuff:
Well, it is actually in the case of taxes a little bit of sequential game. The issue is in terms of readiness, do I care if the other side knows what I’m doing? So if I’m playing to shoot to the right and I announce that ahead of time, would that be a good or a bad thing? And in the case of soccer, it would be a bad thing. If I said it ahead of time who it is that I was going to audit, would that be a good or a bad thing? And the answer is it’s a bad thing because then I would be auditing exactly the wrong people. And so if I move in a way that I don’t want other people to anticipate what it is that I’m doing, to know what I’m doing, that’s typically the case where a random strategy is a good idea.
Brett McKay:
Okay. That makes sense. All right. So we’ve been talking about game theory whenever other people are involved, but you have this interesting section in your book about using game theory against yourself for self-improvement, personal improvement. So how can we apply game theory towards ourself when there’s just one of us?
Barry Nalebuff:
Well, the thing is there isn’t just one of us. So the game we’re playing is against this person who we might call our future self, and we have all sorts of aspirations for that future person. That person’s going to exercise more, eat less, not smoke, be nicer. And while we would like this other person to do all those things, when we become that person in the future, we may decide, I’m going to have another cookie. No, I’m a little tired today. No room to exercise. I can delay my quitting smoking for another week. And so what we want to do is create a game where we change the payoffs for this future person, while today we have some ability to do that. And that’s anything. There’s a gentleman who I think put signs up all over town, which said, “If you find me eating any pies or desserts, you can collect a thousand dollars.” And so the idea is that now he’s turned all of his neighbors into enforcers for him and while he might like to have that pie, now he knows that it’ll cost him a thousand dollars and that’s not worth it. And so two colleagues of mine here at Yale, Dean Carlin and Ian Ayers, started a website called Stick, S-T-I-C-K-K.com that’s also run by one of my former students, Jordan Goldberg. And in this website, it allows you to make commitments against yourself or contracts against yourself where you say, “If I do X, then I will have to pay something to other people as a consequence and therefore I’m not going to want to go ahead and do it.”
Brett McKay:
I’ve used Stick in the past for myself when I had writing deadlines and I needed to get it done. What I think is interesting about Stick is that you can set it up to where you can have the money go to what they call an anti-charity or organization. Because you could say, okay, donate the money to the American Heart Association. You won’t feel that bad if you’re.
Barry Nalebuff:
I was going to do it anyway, so I have to give to the John Birch Society.
Brett McKay:
Right, exactly. So some organization you absolutely despise. Yeah. So that’s game theory in action. That was a result of game theory, that website.
Barry Nalebuff:
Absolutely. You can either give a small amount of money to a charity you despise or a large amount of money, much more than you would have liked to somebody who you feel neutral about or even like. So yeah, I may like the American Cancer Society, but not enough to give them $100,000. And so you may say giving $1,000 to John Birch Society and $100,000 to American Cancer Society were both equally painful to me, if you’d like.
Brett McKay:
Right. That’s interesting. Yeah, I’ve used it before and I think we’ve talked about it before on the podcast before. And if any of you have had trouble with the goal, it is extremely effective. I’ve had home runs with it. I’ve never had a problem having to pay up my money because I always get the thing done.
Barry Nalebuff:
In my own life, before Stick existed, I was teaching a large class and I showed up the first day with a scale and I told my students that if I didn’t lose 15 pounds during the semester, I would teach my last class in a Speedo. And I offered my students the same ability if they wanted to weigh themselves and they would have to come to the last class in a Speedo. And I think about 15 took me up on this. And when my Dean heard about it, he was none too pleased. He said, “Barry, you don’t understand being a professor here at Yale. It’s just not appropriate. It’s just not done. I would be very upset if you taught your last class in Speedo.” And my response was, “Yeah, me too. And that’s why it’s not going to happen.” And of course I lost the weight.
So the idea of committing yourself to do something you really wouldn’t like. And so I worked with ABC Primetime and did a TV show where we took photographs of people wearing Speedos before they lost weight. And these were people who really needed to lose weight and these photographs of them in a Speedo were none too attractive. And the deal was if they didn’t lose 15 pounds over the next six weeks, those photographs would be posted online on TV. And as one woman said, “I know that being obese will lead to heart attacks, diabetes, stroke and death, but that hasn’t been enough to get me to lose weight. Having my ex-boyfriend see me hanging out of a bikini, that’s the motivation I need.” And let’s be clear, we didn’t trick people into doing this. They voluntarily signed up and they were happy to do it because they knew that doing this would actually provide them the deadline and the incentive they needed to get started and to lose weight.
Brett McKay:
But you talk about in the book though, it lost its effectiveness that game because someone didn’t lose the weight and there was a lawsuit involved and you can’t let that image be shown. And they didn’t.
Barry Nalebuff:
Not quite. One person didn’t lose the weight. She actually went down several dress sizes and I think it gained some muscle because she was really working out and so really looked better. And the wimps at ABC decided that they didn’t want to show the photographs because they were afraid of a lawsuit. And so as a result, now when they tried to redo the series, people would say, “Well, okay, if I don’t lose the weight, all I have to do is threaten a lawsuit and I’ll get off the hook.” And so the threat no longer really exists.
Brett McKay:
Right. So what makes that work is the threat. That one aspect of strategizing is using threats.
Barry Nalebuff:
Well, or a promise in this particular case. I mean, it’s a sense of we reach this agreement and if you lose the weight, we don’t show it. And if you do lose the weight, we will show it. And while if you’re going to do this only once, it’s nice to let somebody off the hook because it doesn’t really matter. If you ever thought about doing it again, then once you let them off the hook, you have no credibility in this.
Brett McKay:
Well, that leads me to my, I think a nice segue to my next question about using game theory as a parent with your children to influence good behavior. Because as you said, there’s that tendency if you’re talking to your child about something and you let them off the hook once, they might get in their head, “Well, if mom and dad did it this one time, well, maybe if I do the same thing again, they’ll do it again.”
Barry Nalebuff:
So there’s a great book on this called Parentonomics, Parentonomics by Joshua Ganz, which applies game theory to child rearing. And you might decide the following is a evil, sinister version of parenting, but let’s say that you’ve got two kids and as a parent, you really believe that you can’t hit a kid or corporal punishment, that just doesn’t go anymore. And the kid knows it and so is willing to take advantage of you. Well, so the parent says to the older kid, “Look, if you misbehave, I’m going to punish your sibling.” And the punishment might be whether it be going to bed early or you can’t go see a movie or something. Well, I’ll tell you, one sibling has no compulsion against hitting or doing things to annoy the other sibling much more so than any parent can do. And so if you want to make a credible threat to one kid that if they really misbehave, there’s going to be a serious consequence to it.
The idea of punishing the other one in response might be a much more effective threat.
Brett McKay:
Okay. That’s interesting. I might try that on my five and three year old. We’ll see.
Barry Nalebuff:
It’s wildly unfair and that’s actually part of the whole point is that it’s unfair.
Brett McKay:
Okay. Well, any other ways that parents can use game theory to influence good behavior, like get your kid to read more or say please or thank you? I mean, just anything.
Barry Nalebuff:
Well, the one that I don’t know how much game theory you’ll think of this is my strategy with our kids was to give them an opportunity to have a list of three foods that they didn’t have to eat. And they could change that list after any meal, but not before a meal. And so this led them to think about strategies in the sense of, well, dad doesn’t like Brussels sprouts, so even if I don’t like Brussels sprouts, I probably don’t have to put it on the list because it’s not going to be served very often. And then it’s how intensely do I dislike this? How often is something going to be served? And so they have control in the sense that they really don’t like something. They can put it on a list, but they have to choose which items. They can’t have an infinite list.
And that seemed to eliminate most fights that we had over food.
Brett McKay:
Okay. That’s interesting too. I’m going to try that one out too, all my kiddos. Well, Barry, this has been a really interesting conversation. Where can people learn more about your book and your work?
Barry Nalebuff:
If they go to barryNalebuff.com, there’s a whole list of books that I’ve co-authored on everything from innovation to competing and cooperating, to problem solving, to business strategy, to startups. My most recent book is done in graphic form, telling the startup of honesty. And then I’ve just done a free, emphasize the word free, online course on negotiation, which takes game theory and applies it to how you can become a better negotiator. And that’s at Coursera, C-O-U-R-S-E-R-A.org. And if you want the whole link, it’s coursera.org/learn/negotiation.
Brett McKay:
Perfect. Well, Barry Nalebuff, thank you so much for your time. It’s been a pleasure.
Barry Nalebuff:
Thank you for having me.
Brett McKay:
My guest today was Barry Nalebuff. He’s the author of the book, The Art of Strategy. It’s available on amazon.com and bookstores everywhere. Also check out his website, barryNalebuff.com for more information about his work and check out the show notes at aom.is/gametheory for links to resources where you can delve deeper into this topic.
