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.
Barry Nalebuff: One of the many people have lots of great ideas and the challenge, there are two problems with a great idea. One is that you’re probably the wrong person to implement it and the other is that you are not done that great idea. And so how can you learn to be better at coming up with ideas? And what can you do with your great ideas if you don’t know what to do with [them]?
One example: I like the idea of colored salt; that way we can do a better job seeing how much salt you put on your food. But if I did that and brought [that] to market, in the end, I think I will be just test marketing for Morton.
And so rather than go and start a business which I think wouldn’t ultimately succeed, but I still think is a great idea, let me put it out there and see what the world will do with it. See if I’m right or if I’m not.
The most powerful idea in the website [www.whynot.net] is [vehicle] brake lights that shine brighter when you slam on the brakes; and so I [think that] is a great idea. But then, other people contributed comments to help appreciate how you can do even better. So I not only have a [brake] light shine brighter, but have it changed from green to red. Put a brake light on the front of the car, because if you are approaching intersection, you want to know is that car slowing down or not.
[Have a rear-facing] horn? So that way if the person hits the horn, the car behind you also knows that there is a challenge, not just the one in front of you.
And my favorite is having a brake light also go on the moment the person takes the foot off the gas, because the foot that’s heading to the brake but basically you can know before it gets to the brake that’s where they are going because they really take the foot off the gas really quickly. And by the way, if you make a mistake and put the brake light on extra times, it doesn’t really matter. And so you may get that brake light going on a tenth of a second quicker and I can prevent an accident.
So, somebody starts off with a really good idea, brake lights that shine brighter when you slam on the brakes, and then by the time it’s going through this community, it’s really been improved. Some people are very much better critiquing and improving ideas, other people are proposing them, and this allows those types of people to find each other.
Often we sort of beat up, put down the iconoclast, the creative type who are coming up always with better solutions. It’s not broke, I’m breaking it, and I’m doing it better. And this is the place where whynot.net they can find each other and discover they are not alone and their ideas really aren’t crazy.
Question: What is your advice to someone starting a new company?
Barry Nalebuff: Your idea better be 10 times better than what’s out there, not 10% better, because you’re going to have, first, problems in terms of capital. You are going have trouble hiring great people when you’re starting out because nobody has ever heard of you. Your cost structure [isn’t] going to work, your distribution system is going to be terrible; so all of those things that can conspire against you.
And therefore, if your product or your service isn’t so much better than what is out there, that people can be passionate about what you do, no point in spending all that effort.
Question: Why doesn’t every game theorist become rich?
Barry Nalebuff: One, you can be a great person who understands grammar and that doesn’t mean you are going to write a fabulous novel.
Game theory is a tool, and I’d say absence of tool, you’re probably going to be in trouble. Some people are perfectly natural at it, whether it be Robert Murdoch is probably the [lean] example.
It can help you be a much more sophisticated negotiator, parent, strategist, but if you don’t have the foresight, if you didn’t have the information to put in there, it’s not going to give you the answer. That’s not what [it's] designed to do. I think it can help you get up to speed much more quickly and it may help you reach a conclusion.
The people I’ve met who have been the most successful executives are applying this in everything that they do. And to me, it sort of allows me to get up to speed very quickly in lots of different situations.
It’s pretty much the case now that every student who has gotten an MBA for the last 10 years has had some exposure to this, and some ways, Mike Porter really brought game theory into business strategy. And so you don’t have to say, oh, this is game theory every time you’re using it.
I’d say, everyone whom we teach the Black-Scholes Option formula isn’t able to then go out and make Warren Buffet-like investments either.
Question: What is the premise of your book?
Barry Nalebuff: So, “The Art of Strategy,” it is an opportunity anyone from a high school student to an executive to appreciate how game theory applies to your business, your life, to understand whether it be motivations, incentives, how [and what] you do send signals to others, how to read signals that they are sending to you, how to structure a game, not just play the game.
And we do it through lots of examples. There may be one equation in the book but not much more.
And so through this storytelling and anecdotes, you’ll really have an introduction to what it was that John Nash did and what people talked about when they’re doing game theory. You will be help to understand it and use it. If you really want to be kind, share it with others too, so you don’t just have an unfair advantage.
Recorded on: Oct 2, 2008