thinking strategically book review

Books I Read

Curious reads and finds, thinking strategically: book review.

I finished reading Thinking Strategically by Avinash K. Dixit and Barry J. Nalebuff in March 2010. Subtitled “The Competitive Edge in Business, Politics, and Everyday Life,” Thinking Strategically is an international bestseller and a classic, having been published in 1993. My motivation to read it was because I saw this book listed on numerous forums which listed excellent business books.

The book is organized into three parts, with a total of thirteen chapters. After reading the preface (with the moniker: “ Thinking Strategically —Don’t Compete Without It”), the authors explain in the Introduction that the aim of the book is to improve the reader’s “strategy I.Q” while not promising to “solve every question you might have.”

The first chapter sets an excellent tone for the rest of this book; this chapter profiles ten interesting “tales” of strategy. The book leads of with the phenomenon of the “hot hand,” commonly observed by sports fans and sports analysts. In fact, hot hands in such sports as basketball are actually a fallacy , most likely observed because we (humans) have a tendency to focus on streaks of occurrence rather than non-occurrence…

In the first chapter, the authors also explain so-called zero-sum games: one person’s gain is another person’s loss (basketball, football, poker all fit this description). So what isn’t a zero-sum game? The most inviting example is that of the prisoner’s dilemma , where the payoffs of the two participants do not necessarily offset. In part II of the book, the authors have a lengthy chapter entitled “Resolving the Prisoner’s Dilemma” in which they elucidate a few excellent examples (they use OPEC to build the case). The authors explain that participants of a prisoner’s dilemma may try to achieve cooperation, but that there is a large underlying incentive to cheat even if an agreement is made.

The examples in this book are interesting. For example, in Chapter 2 (“Anticipating Your Rival’s Response”), the authors feature the recurring theme in the cartoon strip Peanuts , in which Lucy holds the football and invites Charlie Brown to run up to the ball and kick it. Of course, we all know Lucy’s intentions, but it’s worthwhile to create a decision tree and deduce what Charlie Brown should do (the authors do admit that the story of Charlie Brown is “absurdly simple,” but that this example allows the reader to become familiar with decision trees for more complex situations). Another example in this chapter is the game of chess, in which the players try to envision how their opponent will play a few moves into the future. I found it interesting that the authors pondered about solving chess, something I wrote about when I linked to the Garry Kasparov article, “The Chess and the Computer.”

In the chapter “Strategic Moves,” you’ll learn about unconditional moves (an example of a TV race between United States and Japan is presented), threats and promises (while an unconditional move gives a strategic advantage to a player able to seize the initiative and move first, you can establish a similar strategic advantage through a response rule—either a threat or a promise), warnings and assurances (a warning is when it is in your interest to carry out a threat while an assurance is when it is in your interest to carry out a promise).

Other chapters in the book include “Credible Commitments” (in which you will learn about “apparent irrationality,” contracts, and why it would make sense to burn bridges), “Unpredictability” (in which you will learn about the min-max theorem and the usefulness of surprising others by surprising yourself), “Brinkmanship” (please note that “brinksmanship” is not a word), “Cooperation and Coordination” (with a most interesting case about stock markets and beauty contests: how do they relate?),”The Strategy of Voting” (with considerations about median voting, the so-called “naive voter,” and how it may occasionally behoove to vote for an enemy to see a result you desire), “Bargaining” (with a discussion of handicap system in negotiations), and “Incentives” (an excellent chapter which sets the case for merit-based bonuses in jobs).

I think the best part of this book are the number of examples and the cases at the end of the chapter which reinforce the ideas discussed. Each case has a thorough solution, and so you can definitely learn a lot by reading through these cases. Speaking of cases, the last chapter of the book is entirely devoted to them; there are a total of twenty-three additional cases to go through which further reinforce the concepts covered in the book (again, solutions to the cases are also provided).

Some interesting quotes from the book follow.

Setting the tone for the book:

You must recognize that your business rivals, prospective spouse, and even your child are intelligent and purposive people. Their aims often conflict with yours, but they include some potential allies. Your own choice must allow for the conflict, and utilize the cooperation. Such interactive decisions are called strategic, and the plan of action appropriate to them is called a strategy. This book aims to help you think strategically, and then translate these thoughts into action.

On threats and promises:

Is is never advantageous to allow others to threaten you. You could always do what they wanted you to do without the threat. The fact that they can make you worse off if you do not cooperate cannot help, because it limits your available options. But this maxim applies only to allowing threats alone. If the other side can make both promises and threats, then you can both be better off.

How do I know this book is dated? Reference to the Cold War on page 3 of the book:

As the cold war winds won and the world is generally perceived to be a safer place, we hope that the game-theoretic aspects of the arms race and the Cuban missile crisis can be examined for their strategic logic in some detachment from their emotional content.

On De Gaulle’s rejection of friendship:

A compromise in the short term may prove a better strategy over the long haul.

On Khrushchev’s silence:

Khrushchev first denounced Stalin’s purges at the Soviet Communist Party’s 20th Congress. After his dramatic speech, someone in the audience shouted out, asking what Khrushchev had been doing at the time. Khrushchev responded by asking the questioner to please stand up and identify himself. The audience remained silent. Khrushchev replied: “That is what I did, too.”

On rules of the game:

There are two general features of bargaining that we must first take into account. We have to know who gets to make an offer to whom, i.e., the rules of the game. And then we have to know what happens if the parties fail to reach an agreement.

On taking risks (this conclusion follows after a case study of the 1984 Orange Bowl game between the Nebraska Cornhuskers and the Miami Hurricanes):

If you have to take some risks, it is often better to do this as quickly as possible. This is obvious to those who play tennis: everyone knows to take risks on the first serve and hit the second serve more cautiously.

An explanation of a dominant strategy with a baseball analogy (situation: one or more players on base, there are two outs in the inning, and a batter is facing a 3-2 count):

We say that running on the pitch is the dominant strategy in this situation; it is better in some eventualities, and not worse in any. In general, a player has a dominant strategy when he has one course of action that outperforms all others no matter what the other players do. If a player has such a strategy, his decision becomes very simple; he can choose the dominant strategy without worrying about the rival’s moves.

What is the dominance in a “dominant strategy”?

The dominance in “dominant strategy” is a dominance of one of your strategies over your other strategies, not of you over your opponent. A dominant strategy is one that makes a player better off than he would be if he used any other strategy, no matter what strategy the opponent uses.

Another revelation of the age of this book:

As we write this, the Iraqi invasion of Kuwait has shot the price of oil up to $35 per barrel and experts are divided about the future of OPEC.

On an interesting police tactic:

Police have been known to scare drug dealers into confessing by threatening to release them. The threat is that if they are released, their supplies will assume they have squealed.

How to deter cheating with punishment (you have to read the book to find out the problem with the approach listed below; alternatively, respond with your thoughts in the comments, and I will make note of the correct response):

Next we ask how severe a punishment should be. Most people’s instinctive feeling is that it should “fit the crime.” But that may not be big enough to deter cheating. The surest way to deter cheating is to make the punishment as big as possible. Since the punishment threat succeeds in sustaining cooperation, it should not matter how dire it is. The fear keeps everyone from defecting, hence the breakdown never actually occurs and its cost is irrelevant.

Threats and promises versus warnings and assurances:

Threats and promises are truly strategic moves, whereas warnings and assurances play more of an informational role. Warnings or assurances do not change your response rule in order to influence another party. Instead, you are simply informing them of how you will want to respond based on their actions. In stark contrast, the sole purpose of a threat or promise is to change your response rule away from what will be best when the time comes. This is done not to inform but to manipulate. Because threats and promises indicate that you will act against your own interest, there is an issue of credibility. After others have moved, you have an incentive to break your threat or promise. A commitment is needed to ensure credibility.

On burning bridges:

Armies often achieve commitment by denying themselves an opportunity to retreat. This strategy goes back at least to 1066, when William the Conqueror’s invading army burned its own ships, thus making an unconditional commitment to fight rather than retreat.

On the element of surprise:

If you choose a definite course of action, and the enemy discovers what you are going to do, he will adapt his course of action to your maximum disadvantage. You want to surprise him; the surest way to do so is to surprise yourself. You should keep the options open as long as possible, and at the last moment choose between them by an unpredictable and therefore espionage-proof device.

The essence of brinkmanship:

The essence of brinkmanship is the deliberate creation of risk. This risk should be sufficiently intolerable to your opponent to induce him to eliminate the risk by following your wishes. This makes brinkmanship a strategic move. Like any strategic move, it aims to influence the other’s action by altering his expectations. [Question for the reader: is brinkmanship a threat?]

On inferior technologies:

Our greater experience with gasoline engines, QWERTY keyboards, and light-water nuclear reactors may lock us in to continued used of these inferior technologies.

Final Thoughts

Most books on strategy and game theory can be dry and/or inaccessible to the general reader with overwhelming mathematics. This book is excellent (and interesting to read) because it has an amazing diversity of illustrative examples drawn from political campaigns, corporate relations, sports, OPEC, the military draft, the Cuban Missile Crisis, the Cold War (especially the Cold War, if I may so myself), speed limits, and other interesting topics. The book is mostly self-contained but it does require multiple sittings to go through it (I spent over a week reading this book), especially if you’re careful to go through the cases and work through some of the solutions to verify the authors’ findings. Do keep in mind that this book was published in 1993, so some of the topics are dated. Nevertheless, if you’re at all interested in strategy, game theory, and are comfortable with basic mathematical concepts, this book is definitely worth a read .

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2 thoughts on “ Thinking Strategically: Book Review ”

Thank you for such a great review. I read about this book from other forum as well, but they typically just say it’s a good read or introductory to game theory. Your review is much more detailed and informative, enough to convince me to order the book. Thank you.

Thanks, Danny! I’m glad my review was helpful.

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Thinking Strategically

63 pages • 2 hours read

Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life

A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.

Chapter Summaries & Analyses

Preface-Part 1

Key Figures

Index of Terms

Important Quotes

Essay Topics

Discussion Questions

Summary and Study Guide

Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life explains how to win at nearly any competition, from poker and product marketing to politics and warfare, using game theory . Published in 1991 by economics professors Avinash K. Dixit of Princeton University and Barry J. Nalebuff of Yale University, the work became an international bestseller. The eBook version of the 1993 re-issue forms the basis for this study guide.

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In life, people often vie to win resources; this applies to everything from poker games to job searches, dating, marketplace competition, elective office, and warfare. In the science of game theory, each of these competitions is considered a “game” for which there are strategies that improve the chances of winning.

Game theory breaks competitions into various types, each with a different strategy for victory. A basketball player with “hot hands” forces the defense to focus on him, freeing up his teammates to make more baskets. A sailboat leading a race copies whatever the second-place boat does and stays in the lead; similarly, large corporations let upstart firms take innovative risks, then copy their successes. Before making commitments, people demand more benefits because they know that, once they’ve signed on, their bargaining power drops. These are examples of the many types of games and how to win them.

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Players make their moves either simultaneously or in sequence. Sequential games, like sports or politics, can be diagrammed with a “game tree.” For each possible move, game trees portray the possible follow-up moves as branching lines that contain further branches for the next round of moves, and so on until the game ends. Simultaneous games—for example, voters on Election Day, or businesses that release competing products on the same day—can be charted with tables that list one player’s options as rows and another player’s options as columns; the resulting squares display the results of each combination of options.

In many games, players find they have a “dominant strategy,” an approach that works at least as well or better than any other option. No matter what the other players do, the player’s dominant strategy is the best one to use. Similarly, “dominated” strategies are worse than all other approaches and should be removed from consideration. Some games end up in an “equilibrium,” where each side has one consistent strategy no matter what the other side does. 

A common game in society is the prisoner’s dilemma , where two or more parties agree to do something costly to each but beneficial to all, except the players also are tempted to defect and get a free ride on the others’ sacrifices. If all players think this way, cooperation collapses and the result is worse for everyone than if they hadn’t agreed in the first place. Price fixing is a common example of this type of cooperation: It’s hard to prevent members from cheating.

In games that last indefinitely—business competition, or international diplomacy, as examples—cooperation can be enforced because players will face future punishments if they defect. When a game has a final round, players will defect at the end because they won’t suffer punishment; this realization causes all cooperation to collapse. In games where players always punish negative behavior, any lapse may cause the game to become a feud, a loop of endless punishments.

Players sometimes can control events with “strategic moves,” promises either to do something unilaterally or to punish or reward the others under certain conditions. A candidate might promise to lower taxes no matter what; a country might promise to retaliate if another nation attacks the country’s allies. Strategic moves only work if the promise is believable; opponents are more likely to believe a player who makes a commitment of resources to fulfill the promise.

Several approaches can improve a player’s credibility: These include a good reputation, written contracts, cutting off communication and burning bridges to remove the temptation to renegotiate or retreat, moving in small steps to prevent defaulting, using self-reinforcing teams, and negotiating through an arbitrator.

Players need to randomize their attacks. A tennis player who always serves to an opponent’s backhand will do much worse than if the serves are randomized to both backhand and forehand. It’s possible to figure out the best mix of serves based on the opponent’s strengths and weaknesses; even if the opponent figures out that mix, moment-to-moment randomization of serves makes it impossible to predict the next serve.

One form of strong commitment is brinkmanship , the art of dragging an opponent toward a disastrous outcome if the opponent doesn’t make concessions. During the Cuban Missile Crisis of 1962, US president Kennedy demanded that the Soviet Union remove nuclear missiles it had placed in Cuba, just off the US border; he ordered a blockade of Russian ships nearing Cuba with more missiles. Soviet premier Khrushchev backed down on condition that the US secretly remove its own nuclear missiles from bases in Turkey, close to the Soviet Union. Kennedy’s brinkmanship used the threat of total disaster to scare his opponent. Such tactics always are risky; there’s no way to design such a game without the possibility of sliding accidentally toward complete destruction.

People’s individual choices sometimes combine, in group settings, into results that are worse than no choice. This is due partly to a lack of pricing: Pollution has no price, for example, because it’s not for sale. It’s also due to incentives that work for individuals but not for groups: If everyone is speeding, it’s safer to go along with them but less safe than if everyone was obeying the speed limit. Sometimes people adopt a product standard that’s worse than others—the QWERTY keyboard, or gasoline engines, or light-water nuclear reactors—because of flukes during the product’s development processes. In these situations, outside intervention sometimes can reset the incentives so the group arrives at a better solution.

Voting is a game in which participants try to promote their candidate by placing votes where they do the most good, not always by voting directly for their preferred candidate. No voting system is perfect, and ballots with multiple candidates can generate especially strange results, so that winners sometimes aren’t anyone’s first choice.

Negotiation is an important game, with results dependent on the rules of the interaction and the amount of each side’s needs. For evenly matched opponents, generally the resources in contention get split 50/50, but the less-patient side tends to give in to the more-patient one.

Companies design incentives so that employees focus on doing good work. A software firm, for example, might offer computer programmers a bonus if their work produces applications that sell well. Partnerships, meanwhile, must be designed so that one side doesn’t get a free ride or quit suddenly. Firms should put up a large sum toward the project and suffer financial penalties if they back out; each partner should profit in proportion to its costs, though this can cause them to pad their expenses.

Every chapter in Thinking Strategically contains a Case Study—a real-world example of the chapter’s principles—with a discussion on the best solutions. Chapter 13 contains 23 Case Studies that cover these and other game theory situations.

The book is easy to read for the non-professional; its style is enthusiastic and sometimes humorous. The work includes many charts, diagrams, and tables that clarify the content, along with 36 pages of notes. 

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