Tony Curzon Price says game theory is a dangerous business that has had its day

Spectator ^ | Tuesday, 13th January 2009

[nickcarraway]

The Art of Strategy: A Game Theorist’s Guide to
Success in Business and Life
Avinash Dixit and Barry Nalebuff
W.W. Norton £16.99, 512 pages

Was Solomon wise for suggesting a baby be split in two, or just lucky? Lucky, say the authors – two jovial American business school gurus – of The Art of Strategy: A Game Theorist’s Guide to Success in Business and Life. The fake mother should have anticipated Solomon’s cunning. She should have feigned self-sacrifice. His judgement would not then have extracted the truth.

The authors then describe ‘the simplest of the devices that would have worked’. Solomon announces that whoever does not end up with the baby will be fined unless they immediately admit to lying. If no one comes clean, the child is auctioned. As long as the true mother is prepared to pay more than the false mother, then this mechanism induces the fake mother to own up. No money changes hands. The real mother gets the baby. This would be the simplest proof of Solomon’s sagacity.

I prefer history’s judgement: Solomon was wise. He was a judge of character and situation. He played a trick that worked in the circumstances. Indeed, if he had read this book, he might have flunked his historical opportunity.

I co-founded the game theory consultancy that won glory for designing the 3G telecoms spectrum auction that put £25 billion into Brown’s coffers in 2001. It was blamed by many for sinking the telecoms industry into a recession from which it has hardly recovered. The auction sold five licences for 3G phone operations into the peak of the dotcom frenzy, and the auction design ensured that bubble mania was turned into a very costly hard-cash transfer from telecoms shareholders to the government. I did my PhD under one of the field’s leading figures and I once believed that game theory was the way and the truth.

But I have faith no more. Game theory was first put to use by polymath John von Neumann during the second world war: as the North Atlantic sea route is the shortest, German U-boats should assume the Allied ships would use it and should concentrate patrols here; but the Allies, understanding this, should adopt the southern route; the Germans, anticipating this, should deploy U-boats to the south and therefore the allies can safely go north. Right? Von Neumann proved that it is best to just flip a coin to pick the route, a coin weighted carefully to the circumstances of each option. It was a great and useful piece of mathematics.

Application to commerce, where profits depend on your rivals’ behaviour, seems as natural an extension of game theory as business is a peaceful extension of war. But as a game theorist who went into business, I can attest that it perfectly solves problems that are hardly ever crucial.

By some great piece of PR, game theory makes a claim to being the study of strategy. But that is a pretence. Strategy consultants, for example, are people who try to understand businesses and markets from the inside: what drives the consumer? What is happening to technology? What are the characters and histories of the firms involved? What are the networks of influence? Why do we stop going to Starbucks? What influence does this have on the ecology of high streets? What opportunities does it create? What should Starbucks do? Will it go bust? Game theory does not answer these questions of strategy.

Once your business judgement is made and your strategic goals are set, then you might pick the brains of a game theory guru for tactics. Even then, you should take his or her advice with lashings of salt. Game theory has a terrible secret: its strongest prediction is that when games are repeated, almost anything is possible. It can make no actual predictions. The authors here talk about ‘tit-for-tat’ – the rule of thumb that says that you should start interactions by being nice, punish nastiness and soon forgive. The rule does well in many situations. David Willetts, the brainy Conservative MP, speaks lyrically of tit-for-tatting vampire bats that share blood in a kind of gruesome insurance pool. He suggests that this could become the philosophical underpinning of Cameron Conservatism.

But Willetts should stay off the game theory. Tit-for-tat is not a good description of the world: cycles of violence, war and revenge, group loyalties and hierarchies, coalitions of the strong ganging up on the weak – these constants from the history of humanity are quite absent from nice tit-for-tat.

If you can’t predict, maybe you can still prescribe? Unfortunately, among the MBAs who throng Wall Street and the City, game theory has been quite successful at this. It ultimately encourages the following three habits: 1) maximum extraction of advantage from whatever rules you labour under; 2) concentration on the minutiae, ignoring your place in the wider whole of business and society; and 3) always think: ‘what are the pay-offs?’

This takes us rapidly to the credit crunch: stretch rules to their limits, don’t worry about systemic effects, don’t think about ethics – and measure success in Ferraris. Game theory has made the financial world in its image, and we are now trying to rescue ourselves from it.

Is this book a guide to success in business? Probably not, unless you want to go into competition law, running complicated auctions, utility regulation or military micro-tactics. Is it a guide to life? The trouble lies in its shallow psychology. The games you play and the way you play them change you as a person – today’s game changes the games and pay-offs you will face tomorrow. A focus on the tactics of life squeezes out the important questions of what a good life should be.

The financial crisis is also a crisis for economics: why did the discipline fail so spectacularly to predict it? Worse, did it contribute to making the meltdown possible? Game theory will lose its shine. Economic history and macroeconomics will survive. But books like this will soon seem very prelapsarian.

[grey_whiskers]

The authors then describe ‘the simplest of the devices that would have worked’. Solomon announces that whoever does not end up with the baby will be fined unless they immediately admit to lying. If no one comes clean, the child is auctioned. As long as the true mother is prepared to pay more than the false mother, then this mechanism induces the fake mother to own up. No money changes hands. The real mother gets the baby. This would be the simplest proof of Solomon’s sagacity.

What a crock of shit.

This only works if you *know* the real mom has the wherewithal to pay more than the fake mom; AND that the fake mom (who already had committed kidnapping and perjury) didn't have some psychological disorder which compelled her to get the living baby at all costs.

(Recall the grisly crimes where a pregnant woman was murdered and her unborn, near-term baby stolen so that the murderer could 'have a child of her own' which she then pretended was hers.)

"In theory, theory and practice are the same, but in practice, they're not."

Cheers!

[an amused spectator]

My observation of the credit crunch is this:

I knew that everyone was spending beyond their means. I was "an idiot" and "a dope" for not joining the joyous Doo-Dah parade. At least, that was the consensus, and I was beginning to believe it myself.

Now, here we are, and the economy is in a flat spin.

The answer is that people lie all day, every day, to themselves and to everyone else, and even reality can be denied until it lands on their heads like a pallet of bricks.

How do you get away from the general crowd of sharpsters, when if you try, eventually the government sharpsters will come after you to force you back into the Doo-Dah parade?

It's beyond me, but I'm still thinking about it.

[Lancey Howard]

America is dead and gone. The last election was the exclamation point.
It’s now officially every man for himself.
I suggest everybody take a crash course on how to game the system and grab every government penny they can lay their hands before the usual parasites gobble everything up. Remember, the parasites now outnumber the hosts in this country, 53% to 47%, so don’t delay.

[rmlew]

The really sad part is that the delusional lemmings, who have proclaimed themselves “Realists”, rigidly apply the same preconceived notions of game theory as the absolute models on international affairs. They assume that Iran will act rationally because it is in their long term interest to cooperate.