Review The Art of Strategy by Dixit and Nalebuff
A Game Theorist's Guide to Success in Business and Life
Mar 10, 2009
Game theory provides a method for strategic thinking to beat adversaries or to win in competitive situations. It is also the art of when to cooperate even if their motives are selfish. The most famous example is the prisoner's dilemma but this book explores many anecdotes and examples from business, sports, politics, negotiations and popular culture.
Game Theory
Game theory was pioneered by John von Neumann and is a branch of social science that studies strategic decision-making. A game is a situation of strategic interdependence where the outcome depends on the actions and choices [strategies] of two or more players. If the players interests are in strict conflict - one gains whilst the other loses - then it is a zero-sum game. The moves in a game may be sequential or simultaneous. The authors explore game theory through stories and anecdotes from all aspects of life.
Rules of Strategy and Nash Equilibrium
This exploration leads to using rules of strategy and possibly finding the Nash Equilibrium as a potential way to solve dilemmas:
- Look forward and reason backward
- If you have a dominant strategy, use it
- Eliminate from consideration any dominated strategies and strategies that are never best responses, and go on doing so successively
- Look for an equilibrium, a pair of strategies in which each player's action is the best response to the other's
Conflict and Cooperation
The authors note that the game theory early years were mainly focused on zero-sum games but that the work of John Nash, and the Nash Equilibrium, allowed this to be extended to combine conflict and cooperation. However, there are many games with multiple equilibria or potential solutions and the work of Reinhard Selten refined the Nash Equilibrium to eliminate some of the multiplicity by forcing players to recognise that players may make a mistake when moving. It also becomes much more important to understand what information or knowledge each of the players has as this also affects a player's move.
Auctions
The authors explore a number of ideas and examples of using game theory such as auctions. These auctions may use different systems such as the English, Japanese or Dutch but the bidding process and contest is explained in simple terms. Whilst the explanations are clear it is probably also true that the reader may benefit from reading the text more than once to fully understand it. For example, the "T-BILLS" US treasury auction section explains how the auction was changed by the government to the uniform price rule. However, as quoted the example shows no benefit for the government but the authors make the point: "the problem with this analysis is that people won't bid the same way in two auctions" and then proceed to give an example of how a different rule affects the bidding.
The Art of Strategy
The authors have written a book of well over 400 pages that draws on many examples to explain the key concepts, with minimal mathematics used making it very accessible. This strategic decision-making is applicable to all aspects of life and the authors state their intent as "we hope that you will emerge a more effective manager, negotiator, athlete, politician, or parent". Anyone interested in game theory and strategic decision-making will find this a useful book that will repay close study.
The Art of Strategy: A Game Theorist's Guide to Success in Business and Life by Avinash K. Dixit and Barry J. Nalebuff. Norton 2008. ISBN: 978-0-393-06243-4
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