Chapter 1: Introduction

Overview

“Honour and profit lie not in one sack.”

Proverb ^[1]

Your life consists of games, situations in which you compete for a high score. Game theory studies how smart, ruthless people should act and interact in strategic settings. This book will teach you to solve games. In some games you will negotiate for a raise; in others you will strive to ensure that an employee works as hard as possible. Sometimes you will know everything, while in other games you will have to guess at what others know that you don’t. Occasionally competitors will have to work together to survive, while in other situations cooperation will be impossible since the winner will take all. Many of the games will seemingly have nothing to do with business, but will be presented to give you insights into strategy. Since the games that businesspeople play are both complicated and diverse, this book will provide you with the intellectual tools necessary to recognize what kind of game you’re playing, and, more important, to maximize your payoff in any game you’re in.

In the world of game theory there exists no mercy or compassion, only self-interest. Most people care solely about themselves and everyone knows and accepts this. In game theory land your employer would never give you a raise because it “would be a nice thing to do.” You get the raise only if you convince your employer that it serves his interests to give you more money. Game theory land resembles the hypercompetitive all-against-all environment that often characterizes business in the capitalist world. But, as this book will show, even when everyone acts totally ruthlessly and extremely competitively, the logic of game theory often dictates that selfish people cooperate and even treat each other with loyalty and respect.

This book is fluff free! Game Theory at Work won’t teach you about power-chants, discuss the importance of balancing work and family, or inspire you to become a more caring leader. This book will instead help you to outstrategize, or at least keep up with, competitors inside and outside your company.

Economists have devoted much thought to how you should play games of strategy, and these ideas, which constitute game theory, influence the thinking of businesspeople, military strategists, and even biologists. They also infiltrate everyday life, whether you recognize it or not. Almost all MBA students and undergraduate economics majors will formally encounter game theory in the classroom. Not understanding game theory puts you at a tactical disadvantage when playing against those who do.

You will find game theory ideally suited for solitary study because it’s interesting . Sure, accounting is at least as important to business as game theory, but do you really want to spend your free time memorizing the rules of what constitutes a debit? Perhaps the most interesting thing that human beings do is compete. Game theory, the study of conflict, illuminates how rational, self-interested people struggle against each other for supremacy.

In game theory players often base their moves on what they think other people might do. But if your move is based on what your opponents might do, and their moves are based on what they think you are going to do, then your move will in fact be somewhat based on what you think your opponents think that you will do! Game theory can get complicated, but then so can business.

Ideally, you would learn game theory by reading a textbook . Actually, this isn’t true. Your time is valuable , and textbooks are designed to be studied over several months. So ideally you should learn game theory by reading a relatively short, accessible book such as this. Game Theory at Work is more accessible than a textbook, but perhaps more challenging to read than the typical mass-market book. To master game theory you must engage in active learning: you need to struggle with puzzles and (obviously) games. The Appendix contains study questions to many chapters. Although you could follow the entire book even if you skip all these questions, struggling with them will make you a stronger player.

This book will challenge your intellect by showing how strange and seemingly paradoxical results manifest themselves when humans compete. Among this book’s lessons are the following:

• Never hire someone too eager to work for you.

• {% if main.adsdop %}{% include 'adsenceinline.tpl' %}{% endif %}

  Have less trust in smokers.

• Many people in business exhibit honesty not because they are moral but because they are greedy.

• Eliminating choices can increase your payoff.

• Burning money can increase your wealth.

• Stock prices respond quickly to new information.

• Day-traders still need to worry about their stock’s long- term prospects.

• Exposing yourself to potential humiliation can increase your negotiating strength when seeking a raise.

• Inmates in mental institutions have a few negotiating advantages over their somewhat more sane corporate counterparts.

• Learning about Odysseus’ recruitment into the Trojan War provides insight into why stores issue coupons .

You might ask, “Will reading this book help me make money?” A true game- theoretic answer might be that since you have probably already bought this book, I don’t really care what benefit you would receive from reading it, so why should I bother answering the question? In fact, you likely only purchased this book after reading the jacket, the table of contents and maybe the first paragraph of the introduction. Perhaps I should only bother putting a lot of effort into these very small parts of the book and just ramble on for the rest of it to fill up space. For the rest of the book I could just ramble on and on by being very, very, very verbose as I repeat myself over and over again by just rambling on to fill up the space that I have to fill up for you to think that this book is thick enough to be worth the book’s purchase price. After all, I have more important things to do in my life than write for the pleasure of people I have never even met. Of course, I like money, and the more copies of this book that sell, the more money I’ll get. If you do like this book, you might suggest to a friend that she buy a copy. Also, if I choose to write another book, you will be more likely to buy it if you enjoy this one, so probably for purely selfish reasons I should make some attempt to provide you with useful information. Furthermore, as of this writing my publisher, McGraw-Hill, still has the contractual right to reject this manuscript. Since McGraw-Hill is a long-term player in the publishing game, they would be harmed by fooling book buyers into purchasing nicely wrapped crap. Alas, this means that if I manifestly fail to put anything of value in this book my publisher will demand the return of my advance. Beware, however, if you end up enjoying this book, it’s not because I wrote it for the purpose of making you happy. I wrote it to maximize my own payoff. I don’t care, in any way, about your welfare. It’s just that the capitalist system under which books are produced in the United States creates incentives for me to seriously attempt to write a book that customers will enjoy and perhaps even benefit from reading.