Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life

“[…] you must recognize that your business rivals, prospective spouse, and even your child are intelligent and purposive people. Their aims often conflict with yours, but they include some potential allies. Your own choice must allow for the conflict, and utilize the cooperation. Such interactive decisions are called strategic, and the plan of action appropriate to them is called a strategy.” 

Interactions with others involve overcoming their opposition and enrolling them in teamwork. Game theory helps with figuring out how to do these things. Sometimes the answers are non-intuitive and surprising, but those who accept these strange conclusions have a better chance of coming out on top. 

“The branch of social science that studies strategic decision-making is called game theory. The games in this theory range from chess to child-rearing, from tennis to takeovers, and from advertising to arms control.” 

For each competition in life, there are one or more techniques from game theory that can improve play. The goal of the competitor is to find the best such techniques and apply them skillfully to win the day. With practice, this approach improves a player’s chances. 

“Any useful analysis of games should be able to handle a mixture of conflict and concurrence of interests. We usually refer to the players in a game as ‘opponents,’ but you should remember that on occasion, strategy makes strange bedfellows.” 

Some competitions, such as the prisoner’s dilemma with its opportunities for cooperation or cheating, can be managed so both sides win, but both sides must trust each other, which can be difficult. In those situations, there’s a chance to win outright by cheating. Players must look carefully at each situation before deciding which strategy to use. 

“Rule 1: Look ahead and reason back. Anticipate where your initial decisions will ultimately lead, and use this information to calculate your best choice.” 

In sequential competitions, where first one player moves and then the other, each side must predict what the other side will do next and prepare to counter that move. Then they consider how their counter-move will affect their opponent’s future play, and so on. This can get complicated very fast, so a tree diagram, with options that branch off from each earlier option, helps a player keep track. 

“Do not be concerned about your rival’s choice. If you do not have a dominant strategy, but your rival does, then anticipate that he will use it, and choose your best response accordingly.”

A dominant strategy isn’t necessarily the winning strategy, but it’s the best one for the player. If you can figure out the other player’s dominant strategy, you can expect that she’ll use it, which simplifies your planning, even if it doesn’t guarantee that you’ll win. The time and effort saved can be used to fight other battles. 

“The Second World War was nearly won, and Yossarian did not want to be among the last to die. His commanding officer asks, ‘But suppose everyone on our side felt that way?’ and Yossarian replies, ‘Then I’d certainly be a damned fool to feel any other way. Wouldn’t I?’”

This quote from the book Catch 22 illustrates the central problem of the prisoner’s dilemma: If we cooperate, we’ll do better, but if I betray you, I’ll do better still—except that, knowing that, you’ll probably betray me, too, and we’ll both suffer. Any situation in which everyone must sacrifice their best option to produce a better option for all will likely fail as members, distrusting each other, back out of the deal. 

“To sum up, there is no solution that achieves reciprocal cooperation in a one-time game. Only in an ongoing relationship is there an ability to punish, and thus a stick to motivate cooperation.” 

If a game is played only once, the cooperating players will be tempted to cheat, since the other players won’t be able to punish them, as there’s no next round. If there is a next round, though, players can shun or betray the cheater. This threat can keep cooperating players in line, be they criminals interacting in prisons, businesses keeping prices high, or countries that together restrict production of resources. 

“Tit-for-tat is a variation of the ‘eye for an eye’ rule of behavior: do unto others as they have done onto you. More precisely, the strategy cooperates in the first period and from then on mimics the rival’s action from the previous period.” 

When a player uses a tit-for-tat strategy, opponents quickly learn that they get punishment for cheating and cooperation for helping. Their dominant strategy becomes simple: cooperate. Thereafter, both sides tend to work together. 

“Feudists on either side are not willing to end the feud until they consider themselves even. But in a continuing attempt to get even, they end up knocking each other further and further down. Eventually they’ll end up dead even.” 

Some game strategies, like tit-for-tat, respond to cheating with punishment. If, though, players punish each other and then retaliate for the punishments, this creates an endless loop of penalties, which can grind down both side’s resources until they collapse. One solution is for a player suddenly to make a cooperative move; this gives the other player a chance to respond in kind and break the feud. 

“It takes a clever carpenter to turn a tree into a table; a clever strategist knows how to turn a table into a tree.” 

This humorous footnote comment speaks to two points: First, converting a log of wood into a valuable product requires intelligence, but doing the reverse requires genius. Second, a “table” also means a chart of information encoded into rows and columns—a project that requires some effort—while a “tree” is a diagram of branching options, and converting a table’s worth of information into a tree diagram takes a lot more creative thought. This proves useful only if the player also manages to convert a simultaneous game into a sequential one. 

“An unconditional move gives a strategic advantage to a player able to seize the initiative and move first. Even when you don’t actually move first, you can achieve a similar strategic advantage through a commitment to a response rule. The response rule prescribes your action as a response to the others’ moves.” 

An unconditional, or strategic, move promises a specific starting move or a specific response to a given action. Though this limits the committed player’s options, it also limits the range of responses from the other players; it can force opponents into moves they’d rather not make. A response rule is a threat or promise meant to deter or encourage a particular move by one or more opponents; its effect depends on the initiating player’s credibility. One way to establish credibility is to commit resources to back the promise. 

“Establishing credibility in the strategic sense means that you are expected to carry out your unconditional moves, keep your promises, and make good on your threats.” 

Strategic moves involve commitments to do specific things. If no one believes the commitment, it becomes useless. It’s better, then, to take some allied action to prove seriousness—for example, burn one’s bridges of escape, set up a contract, or do things one small, consistent step at a time. 

“The right amount of unpredictability should not be left to chance.” 

Unpredictable behavior can be designed, and the percentages of each type of move can be customized to every opponent. Even if the opponent figures out those percentages, their moment-to-moment randomness prevents the opponent from correctly predicting a given move. Strangely, a player’s percentage of various attacks will be equal to the opponent’s percentage of correct responses; thus, both sides can know the other’s general strategy and still be unable to successfully guess the next move. 

“A management team and a trade union facing a devastating strike, stubborn spouses whose failure to compromise is leading toward divorce, and a divided Congress risking a government shutdown if it fails to ratify a budget are all engaged in brinkmanship. They are deliberately creating and manipulating the risk of a mutually bad outcome in order to induce the other party to compromise.” 

Brinkmanship, the art of dragging an opponent toward disaster if they don’t compromise, can show up in many day-to-day situations, but it’s a dangerous gambit. If the other party is stubborn, both may suffer disastrous consequences. It’s important to control the amount of risk to minimize the chance of a mistake escalating out of control. This can be achieved by moving toward the brink in small steps. 

“The important insight from game theory is to recognize early on the potential for future lock-in—once one option has enough of a head start, superior technological alternatives may never get the chance to develop.” 

Gas-power cars, QWERTY keyboards, and light-water nuclear reactors are examples of inferior technologies that became standard for historical reasons unrelated to the technologies themselves. The cost of competing with a developed standard, already adopted by most of the marketplace, becomes too much to overcome, and all competing technologies fail to make inroads.  

“The point of these stories is that the free market doesn’t always get it right. There are two fundamental problems. One is that history matters. Our greater experience with gasoline engines, QWERTY keyboards, and light-water nuclear reactors may lock us in to continued use of these inferior technologies. Accidents of history cannot necessarily be corrected by today’s market. When one looks forward to recognize that lock-in will be a potential problem, this provides a reason for government policy to encourage more diversity before the standard is set.” 

When people make choices about which standard they’ll use, they sometimes end up with inferior results. It’s safer to go with the flow of traffic even when it’s speeding; a better approach would be to flow with law-abiding drivers. With a brief campaign of tough enforcement, the government can reset the common driving speed to a safer level, and that becomes the new standard. 

“The foundation of a democratic government is that it respects the will of the people as expressed through the ballot box. Unfortunately, these lofty ideals are not so easily implemented. Strategic issues arise in voting, just as in any other multiperson game. Voters will often have an incentive to misrepresent their true preferences. Neither majority rule nor any other voting scheme can solve this problem, for there does not exist any one perfect system for aggregating up individuals’ preferences into a will of the people.” 

Every voting system causes distortions in the way people vote, with the result that often the win goes to a candidate no one preferred, and sometimes the people get their least-popular preference. This is especially true in multi-candidate elections or in deciding policy by ballot. The problems can be minimized by tinkering with the number of candidates a voter can choose, the number of candidates who succeed to the next round (as in political primaries), or the order in which the parts of a policy are voted. 

“A vote can have one of two effects. It can be instrumental in determining the outcome, or it can be a ‘voice’ that influences the margin of victory or defeat without altering the outcome.” 

Voters’ decisions can get complex. They sometimes vote for a candidate they don’t want just to influence the candidate they expect to win; or they vote for a ballot measure they don’t want, hoping to affect the outcome on another measure. Thus, voting isn’t merely a popularity contest; it’s also a game where the vote becomes a weapon. 

“[…] anyone’s vote affects the outcome only when it creates or breaks a tie.” 

In large public elections, one vote doesn’t matter unless it just happens to tip the balance. The odds of that are nearly zero; thus, voters exercise their rights by marginally increasing the voice of their preferred candidate. In small votes at a board meeting or city council subcommittee, the officials empowered to vote hold much more sway, and their calculations become more complex because a single vote often sways the outcome, and this can affect the shape of subsequent votes. 

“One important element that determines how the pie will be split is each side’s cost of waiting. Although both sides may lose an equal amount of profits, one party may have other alternatives that help partially recapture this loss.” 

The chief concern of both sides, should a strike occur, is which side can outlast the other. One side may have outside sources of income that can help them during a job action; one side may need a strong win to influence other negotiations later on. Opponents’ strengths and weaknesses have a strong influence on the likelihood and duration of a possible strike. A weak side may make large concessions to avoid a work stoppage; two evenly matched and hostile sides might let a strike begin simply to test the actual strength of the other player. 

“When negotiations with other nations on military and economic matters are making slow progress, interested lobbyists seek support from congressmen, senators, and the media, who pressure the administration for quicker results. Our rival nations in the negotiations know this very well, and are able to secure greater concessions from us.” 

It’s the nature of governance and the press in America to want quick results. This puts stress on the US government during talks with other countries. It’s a built-in drawback, not easily fixed, and one that persists over time, so that foreign governments have gotten used to employing that fact as a lever during talks. 

“Each employee or manager in a company is not fully exposed to the chill wind of competition in the market, and the top management of the firm has to devise its own internal carrots and sticks to obtain the desired standards of performance from those below.” 

The marketplace rewards quality and efficiency, but not every worker is equally motivated to produce the best product. Every company is different, and part of the art of management is to figure out what will best inspire various employees. Such incentives can be finely tailored to each type of worker and each company division. Some might get performance bonuses; others might get ownership options; some simply get higher salaries; the options are many and varied. 

“When there is a large number of contenders, the leader of the pack often gets derailed by the cumulative attacks of all the medium-sized fish. It can be advantageous to wait, and step into the limelight only after the others have knocked each other and themselves out of the running.” 

Weak players sometimes increase their chances by waiting in the wings. This is especially true during political campaigns, when the biggest candidates go up against each other early in the election season and often get shot down, giving low-ranking candidates a chance to shine. Sports playoffs avoid this result by forcing weak teams to play strong teams right away.