The Art of Strategy: A Game Theorist's Guide to Success in Business and Life

by Avinash K. Dixit

To convince others to raise your bets, you also need to get caught bluffing.

You should even be worried when you win an auction. The very fact that you were the highest bidder implies that everyone else thought the item was worth less than you did. The result of winning an auction and discovering you’ve overpaid is called the winner’s curse.

In single-person decisions, greater freedom of action can never hurt. But in games, it can hurt because its existence can influence other players’ actions. Conversely, tying your own hands can help.

One of the general morals of this story is that if you have to take some risks, it is often better to do so as quickly as possible.

The key idea here is that when interest rates are low, the future is relatively more valuable. For example, if the interest rate is 100%, then the future has low value relative to the present—a dollar in a year’s time is worth only 50 cents right now because you can turn the 50 cents into a dollar in a year by earning another 50 cents as interest during the year.

Some even guarantee that if you find a better price for the same product within a month after your purchase, they will refund the difference, or in some cases even double the difference. At first sight, these strategies seem to promote competition by guaranteeing low prices. But a little game-theoretic thinking shows that in reality they can have exactly the opposite effect.

What we have here is a cancerous adaptation. If it stays small, it can die out. But if it ever grows too large, it will become the fittest strategy on a sinking ship. Once it ever becomes advantageous even on a relative scale, the only way to get rid of it is to eliminate the entire population and start again.

An easy way to check whether randomness is needed is to ask whether there is any harm in letting the other player find out your actual choice before he responds. When this would be disadvantageous to you, there is advantage in randomness that keeps the other guessing.

Accidents of history cannot necessarily be corrected by today’s market.

Unfortunately, Kenneth Arrow showed that there is no such holy grail. Any way of adding up votes is bound to be flawed.