REVIEW - 'Thinking Strategically' by A. K. Dixit and B. J. Nalebuff

"I confess that I have never thought of monetary policy and government as a game, but Professors Dixit and Nalebuff suceed brilliantly in clarifying questions we all face in decision making, elevated or mundane." 

-Paul A. Volcker 

                                                                                         

'Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life' is  an international bestseller on strategy, game theory and decision making, having been published in 1991. Strategic thinking, as stated in the Preface, is 'the art of outdoing an adversary, knowing that the adversary is trying to do the same to you'. As businessmen and corporations 'must use good competitive strategies to survive', as politicians 'have to devise campaign strategies to get elected, as football coaches 'plan strategies for the players to execute', the authors persuade us to 'practice strategic thinking at work as well as at home'.

The book is structured into three parts which put together 13 chapters, each ending with a case study that give the readers a chance to practice their newly acquired 'decision making skills'.

The first part begins with more of a 'taster' of what the decision making world is about. The 'Ten Tales of Strategy' are instances where strategic thinking can be implemented in order to secure a desired outcome. The authors describe how you can beat people focusing on your 'hot hand' (by switching to the other hand), how to get a guaranteed win when you are in the leading position (by copying the runner-up) and so on. We are told about non zero-sum games(different from zero-sum games - one person's loss is another's gain) where the payoffs of the participants do not necessarily offset each other. We are also given the advice to always be unpredictable when making a decision(i.e. mix our plays), always be firm in our decision making (like Martin Luther when he attacked the authority of popes) but always be cautious and foresee the consequences when committing to a certain course of action. 

In the remaining chapters of the first part the authors illustrate the types of strategic interactions: sequential-move games(where the participants make alternating moves) and simultaneous-move games(when players move simultaneously) and we are introduced to a comprehensive list of rules that we should follow. Particularly, for sequential-move games we are told to 'look ahead and reason back'(Rule 1). For simultaneous-move games we should: Use our dominant strategy(Rule 2), eliminate all dominated strategies(Rule 3) and look for an equilibrium of the game(Rule 4).

In the second part of the book, through the lengthy chapter entitled 'Resolving the Prisoners' dilemma', the authors illustrate how cooperation between participants can solve the dilemma but only if they devise a strategy to detect cheating and punish it accordingly. 

The next two chapters, 'Strategic moves' and 'Credible commitments' set the case for the concepts of unconditional moves, threats, promises, warnings and assurances and how we can make them more credible through supporting or collateral actions named commitments. There are eight ways through which you can gain credibility: reputation, contracts, eliminating communication, eliminating escaping paths, leaving the outcome to chance, moving in small steps, teamwork and employing mandated negotiating agents. The chapter 'Unpredictability' teaches you how to plan the right mix of plays through the min-max theorem when you participate in a zero-sum game. It also depicts how coordinated mixing can solve the problem of games where participants have common interests.

The last part is focused on important real world applications of strategic thinking. 'Brinkmanship' is a strategic practice through which you can make a threat more credible. It consists of deliberately creating a risk and placing it out of your control. We are instructed on how and why brinkmanship worked for the US and ended the Cuban missile crisis. The chapter 'Cooperation and Coordination' shows us that uncoordinated choices  can produce poor outcomes for society as a whole and how public policy could coordinate a change where we are stuck with an inferior standard(such as the inferiorness of QWERTY keyboards compared to DSK keyboards). Later on, we are presented, through the complex chapter 'The strategy of voting', how different voting structures/agendas can produce different outcomes and how controlling them can give you the upper hand. The handicap system of negotiations illustrated in the chapter entitled 'Bargaining' depicts how having a higher outside income possibility(a 'handicap' at first glance) can actually be an advantage when negotiating. 'Incentives' is an excellent chapter that sets the case for merit-based bonuses, showing us why these work. It also depicts the innovation brought to the auctioning world by the Vickrey auction, an ingenious structure that motivates people to bid honestly.

The book ends with the chapter 'Case studies' which covers a large area of applications of all the principles depicted.

Professors Dixit and Nalebuff have done an incredible job at structuring the book. The gradual progress of complexity of the concepts makes it very easy for economics/game theory beginners to advance through the book. I do honestly believe that 'Thinking strategically' is a perfect introductory book to the world of game theory. The astonishing amount of illustrative examples that it provides, from political campaigns to sailboat racing, makes all the concepts easy to understand and reading the book very pleasing and entertaining at the same time. I think anybody all the way from managers to athletes can benefit from reading this book. If you are interested in game theory, 'Thinking strategically' is definitely worth reading.