Monday, March 28, 2011

How to win the "game of chicken"

The point of studying game theory is to understand where you are likely to end up if you play rationally, optimally, and self-interestedly. This is called the "equilibrium" of the game.

If you don't like the payoffs that you receive in the equilibrium of the game, then you had better try to do something about it. Here is a nice discussion of how to change the game of chicken to your advantage.
  • Accept, right off, that there is no way to guarantee victory. The best either player can hope for is to improve the odds of inducing the other player to swerve. Toward that end, there are many tactics, none especially appealing. Start with reputation. If you are known as a nonswerver, perhaps because you have been "undefeated" in previous encounters, your opponent is bound to take that into account.
  • Reputation can be burnished in several ways, like cultivating an image of being literally crazy, or perhaps suicidal.
  • Another tactic: Drive a large and imposing vehicle. If an armored cement truck is confronting a VW Beetle in a game of chicken, who backs down?

6 comments:

  1. Gautam Mattey - Owen MBA 2014November 26, 2012 at 5:35 PM

    When the opponent is a new entrant in the market, let's say in the technology consulting service industry, then this competitor might have nothing to lose. There is not enough asset investment that this player has made and it may be the case that she might want to not swerve when going head to head with a big player in the market. This could be a strategy to derail the big player in the market, whether or not the smaller competition makes a headway or not! e.g. In India, in the technology services industry, there have been instances where small time local companies take on the big corporations in a government bid situation, aggressively price their bid so as to ensure that the bigger players are unable to match and eventually end up winning the bid. The big player knows that the smaller player would not swerve in its decision to price low and ends up dropping out of the bid. This is an exception situation when a beetle makes the truck swerve.

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  2. the link is now subscription based...unfortunately I am not interested enough to pay $89 to read this so I swerved.

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  3. When you are smaller as a kid than the others on the playground you learn this theory the hard way. Nobody will keep bullying you if they know they are going to pay for it. You just have to be willing to lose a lot more than your opponent on the first go round which tips the scale. I am not sure the benefits outweigh the cost of that hard earned intimidation factor in the end though. Kim Jong Un is a good example of this concept. The west doesn't want to play chicken with nukes, but who wants to have to have to publicly execute their uncle to win a game of chicken.

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  4. We see this regularly in the negotiations between entrepreneurs and potential investors. Investors usually carry more power in the negotiation because their threat not to invest in the startup is much more believable than the startups threat (in most cases) to not accept investment.

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  5. I really like the game theory, which is very useful not just in negotiations but also in many management decisions.

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  6. You must always be willing to crash, a few crashes up front will pay off in the long run. Just like Michael J. Fox, nobody wants to be known as a "Chicken," Hello McFly...

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