Barry Nalebuff is the Milton Steinbach Professor of Management at the Yale School of Management. Professor Nalebuff has written on a wide variety of subjects ranging from strategy to pricing, bidding to bargaining, and innovation to incentives. He is an expert on game theory and has written extensively on its application for managers. His most recent book, The Art of Strategy, is an update of the best-selling Thinking Strategically, which explains the fundamentals of game theory using real world examples.
Professor Nalebuff's work on strategy focuses on the fundamental duality in business—the conflict between cooperating to create a pie and competing to divide it up—which he presents in Co-opetition. His book, Why Not?, focuses on providing a framework for problem solving and ingenuity. His work on product bundling was featured in the European Union's investigation of the proposed GE-Honeywell merger.
Question: What are some problems with game theory?
Barry Nalebuff: It’s easy to create a strong man to attack game theory and if you literally think that the payoffs that you’ve written down are completely right, and that the other player and all the players are identical, you will come up with a really stupid answer that is misleading. I think is a poor application of game theory.
That’s also why we called the book “The Art of Strategy.” There is a science behind it, but sometimes it uses a dialogue. It’s providing a common language so that we understand the reason why we think somebody is going to take the strategy is because they see all of these different options playing out on this way, do you agree with that?
Whereas our conclusion falls from our assumptions, so now we can understand do we have a common set of assumptions.
But this article points out something else that I think is even more important: that this multiple levels of game theory and I’d like to think of as [IB] META game theories, or it’s not just about solving a particular game, it’s about making sure you’re playing the right game.
So, how do you go back designing a game? And you can think about that, you could change the rules of the game. You can change the players in the game. You can change the payoffs in the game. You can link one game to another game. So you need to understand some game theory to figure out when I’m doing my game design. Are these changes likely to help me or likely to hurt me? And I think in the end I’m not going to be so precise to say it’s going to be 7.365% improvement, but it’s a good idea to link between negotiations or it isn’t a good idea to link between negotiations. And that’s the level at which I think we can be very helpful.
Recorded on: Oct 2, 2008