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: How does game theory apply in a global context?
Barry Nalebuff: One of the things that is probably the most important aspect of game theory is to be allocentric. So ego is self and allo is other. And you have to understand the other person’s perspective.
Now, the problem is when you put yourself in somebody else’s shoes, the normal thing to do is to put yourself in their shoes as opposed to how they will react in their shoes.
Because they may disagree with me, they may have different information, different preferences. And it’s not what I would do in Saddam Hussein’s shoes. It’s what he would do in his shoes. And I probably disagree with him on that point, but that’s not what game theory tells you.
If you ever think about what the [dear] leader will do, it’s not what a “western or profit maximizing person” will do, it’s what is that person’s objective. And we often say that the other side is irrational because they’re not doing what we would have done. Actually, it’s us who is irrational for not really thinking about what’s driving and motivating the other side.
Question: How can we apply game theory to our Iraq strategy?
Barry Nalebuff: I think that what people are focused on now is really the end game. And what game theory tells you do is look forward, reason backward, and understand where you want to end up and then work backward from there.
Now, one of the things that often help people appreciate that is to actually see the end point. So if various factions there [i.e. Iraq] appreciate that there is a deadline for doing something, well, that gives them [a reason] to say, “Oh, my God! If we don’t reach this outcome by this amount of time, there’s going to be a problem,” as opposed to know this for those current status quo can keep on doing.
And so, of course, the consequences or what happens if they fail. And then you have a sort of the failed state and can actually get to any outcome by 18 months, or whatever time-frame is provided.
But what we tend to do is, literally, do each step at a time, what looks best. And the best example of this was the failed policy of our Defense Secretary [Donald Rumsfeld] who didn’t plan about what he would do after he won, as opposed to starting with, okay, if I win what would I want to do? If I’m not succeeding, what I would I want to do? And play out each of those steps and counter steps and then work backwards to the present.
We need to do the exact same thing. Now, what do we do if we leave and it does blow up? Does that mean that we then comeback? What does the deadline do? And that to me is, of course, the basics of strategy. But, unfortunately, it hasn’t always been done here.
Question: How can we apply game theory to Iraq?
Barry Nalebuff: I’d like to literally see how they imagine playing out both scenarios. And if there is no end point, we know what this is today, but I don’t think that actually is sustainable.
I think it was a line of Herb Stein who says that which is sustainable won’t keep on going forever. And so just because something is working right now, whether it be the surge or something else, doesn’t mean that it’s the long run answer.
So one side has given a perspective which may not work, but at least it’s a change of strategy. The other is saying, well, we are just going to keep on doing what seems to be okay at the time.
Recorded on: Oct 2, 2008