Tying It Together
Game theory reminds you that you don’t need to outrun the bear.
Two friends are visiting a national park in Alaska, and they come across a brown bear. They both freeze. One of them starts to dig through his pack, looking for bear spray. The other puts on her running shoes. Her friend screams: “What are you doing? You can’t outrun a bear!” The friend replies: “I don’t have to outrun the bear; I only have to outrun you.”
It’s a joke, but it points to a deeper truth. Strategic interactions—where your best choice depends on what I choose—play out from the hiking trail to the board room, and everywhere in between. Game theory reveals sometimes unexpected insights—that you have to outrun your friend, and not the bear—that will guide you to better strategic decisions. The interdependence principle reminds you that economic decisions are linked to each other, and game theory provides the road map to making better decisions that take account of those interactions.
That road map consists of four simple steps: Consider all the possible outcomes; think about the “what ifs” separately; play your best response to each; and apply the someone else’s shoes technique.
The idea of putting yourself in someone else’s shoes is critical to understanding how any interaction will play out. Throughout this chapter we’ve suggested that your rival will follow the same four-step process that you do. That is, we’ve characterized other players as being sophisticated strategists, just like you. Is this realistic? Sure, it’s a lot of work to be perfectly strategic all the time, but even people who’ve never been formally trained in game theory are pretty good at figuring out what’s in their best interest. That means that your best response usually is to think of your rivals as strategic. Ultimately, it’s up to you to figure out how smart your rival is, but in my experience, it’s far more common to see managers make bad decisions by underestimating their rivals than by overestimating them.
Our approach in this chapter has been to provide a unified view of game theory, showing how a set of simple ideas inform many strategic situations. We’ve seen that the results of any strategic interaction depend crucially on the rules of the game. Outcomes can change depending on details such as whether the players move simultaneously, who moves first, if the game is repeated, and how often. And this is good news for strategists, because it suggests that if you’re savvy, you can use what we’ve learned to shape the rules of the game to your advantage.