Strategic Thinking

What is Strategic Thinking



Game Theory
Applications to Business
Applications to Life
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
Survivor: Picking Sticks

Rules:



12 Sticks
During a player’s turn each person can pick 1-3 sticks.
Last person to move wins
12 11 10
9
8
7
6
5
4
3
2
1
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
Modified Picking Sticks Game

Rules:



14 Sticks
During a player’s turn each person can pick 1-3 sticks.
Last person to move wins
14 13 12 11 10
9
8
7
6
5
4
3
2
1
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
The Cambridge May Ball

Casino Night

Roulette



Play Money
Winner gets ticket to the ball
In the final round Barry has $700, and Eva $300
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
The Cambridge May Ball

Roulette

Numbers 0-36





0 is green
1-36 odd numbers are Red, even are black
Betting $1 on Red wins with prob 18/37 and
pays $2
Betting $1 on a multiple of 3 wins with
probability 12/37 and pays $3.
What should each person do?
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
Forecasting Stock Performance
Bob is a veteran predictor of stocks. His
predictions appear on a popular Web-Site
Each Monday Morning.
 Jim is unknown




If his stocks perform better than Bob’s he may
attract attention
If his stocks perform the same or worse than
Bob’s he remains unknown.
When should Jim post his picks on his
web-site? How should he make his
choices?
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
America’s Cup
A two boat sailing race
 The Australian boat starts out behind

This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
It’s your move Charlie Brown
Lucy: “I’ll hold the ball, you come running
up and kick it Charlie Brown”
 Charlie Brown “This year I’m gonna kick
the ball out of the universe.”

This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
New Cleaners & Fast Cleaners

Vacuum Cleaners



Existing company Fast Cleaner’s Vacuums
Potential Entrant: New Cleaners
Post Entry choices for Fast Cleaners


Accommodate entry
Fight a price war
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
New Cleaners & Fast Cleaners
Accommodate
$100,000 to New Cleaners
Fast Cleaners
Enter
Price War
$-200,000 to New Cleaners
Newcleaners
Keep Out
$0 to New Cleaners
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
New Cleaners & Fast Cleaners
Accommodate
$100,000 to New Cleaners
$100,000 to Fast Cleaners
Fast Cleaners
Enter
Price War
$-200,000 to New Cleaners
-$100,000 to Fast Cleaners
Newcleaners
Keep Out
$0 to New Cleaners
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
Bargaining: Ice-Cream Pie
Take-it-or-leave-it offers
 The pie is melting

This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
Politics and the High Road
High Road
Obama Wins
Romney
Low Road
High Road
Obama
High Road
Low Road
Romney has
a chance
Romney has
a chance
Romney
Low Road
Obama Wins
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
Dominant Strategies
Professor Jones choosing the right grail
 Baseball: 2-outs, 2-strikes, 3-balls, runner
on first
 Terminology



Dominant Strategy
Dominated Strategy
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
Time and Newsweek
Newsweek’s Choices
AIDS
Budget
AIDS
35* / 35**
70* / 30**
Budget
30* / 70**
15* / 15**
Time’s
Choices
*Magazine sales for Time;
** Magazine sales for Newseek
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
A different situation
Newsweek’s Choices
AIDS
Budget
AIDS
42* / 28**
70* / 30**
Budget
30* / 70**
18* / 12**
Time’s
Choices
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
Football
Defense’s Strategies
Counter
Run
Counter
Pass
Blitz
Run
3*
7*
15*
Pass
9*
8*
10*
Offense’s
Strategies
* Offense’s expected yardage gain
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
Missile warfare
C
Iraqi
Ship
F
B
E
A
I
H
D
American
Ship
G
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
Table of Hits and Misses
Iraqi Strategy
A
M
E
R
I
C
A
N
1-IFCB
2-IFEB
3-IFED
4-IFEH
5IHGD
6IHED
7-IHEB
8-IHEF
1-ABCF
H
O
O
O
O
O
O
H
2-ABEF
O
H
H
H
O
H
H
H
3-ABEH
O
H
H
H
O
H
H
H
4-ABED
O
H
H
H
H
H
H
H
5-ADGH
O
O
O
H
H
O
O
O
6-ADEH
O
H
H
H
O
H
H
H
7-ADEF
O
H
H
H
O
H
H
H
8-ADEB
H
H
H
H
O
H
H
H
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
Dominated Strategies
Iraqi Strategy
A
M
E
R
I
C
A
N
1-IFCB
2-IFEB
3-IFED
4-IFEH
5IHGD
6IHED
7-IHEB
8-IHEF
1-ABCF
H
O
O
O
O
O
O
H
2-ABEF
O
H
H
H
O
H
H
H
3-ABEH
O
H
H
H
O
H
H
H
4-ABED
O
H
H
H
H
H
H
H
5-ADGH
O
O
O
H
H
O
O
O
6-ADEH
O
H
H
H
O
H
H
H
7-ADEF
O
H
H
H
O
H
H
H
8-ADEB
H
H
H
H
O
H
H
H
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
Reduced Table of Hits and Misses
Iraqi Strategies
American
Strategies
IFCB
IHGD
ABED
O
H
ADEB
H
O
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
Nash Equilibrium
Definition
 Feast: Too many equilibria




Standards: Driving on the right side of the
road.
Phone connection breaks off: Who calls back
Famine


Re-examine the Missile game
Mixed Strategies
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
Summary of Concepts

Sequential Games




First Mover Advantage
Second Mover Advantage
Solve the game backwards
Simultaneous Move Games


Look for Dominant Strategies
If there are no Dominant Strategies, eliminate
Dominated Strategies, and check for dominant
strategies in the simplified game.
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
Summary Continued…

More on Simultaneous move games

If all else fails use Nash Equilibrium


Each player selects a strategy that maximizes his
payoff given the strategy selected by the other
player.
Characteristics of Nash Equilibrium


Sometimes there is more than one
Sometimes there is no Nash Equilibrium in pure
strategies. There is always a Nash Equilibrium in
mixed strategies
This slideshow was written by Ken Chapman, but is substantially based on concepts from Thinking Strategically by Avinash
K. Dixit and Barry J. Nalebuff, W.W. Norton 1991.
Mary and Bob are playing the game described in the table below.
Bob picks the columns (either A, B, C, D or E while Mary picks the
rows (either 1, or 2). Use concepts from class to pick the likely
outcome of this game if their choices are made non-cooperatively
and simultaneously.
Bob picks
A
Bob picks
B
Bob picks
C
Bob picks
D
Bob picks
E
Mary picks
1
11*,12**
1*,14**
12*,11**
0*,15**
1*,1**
Mary picks
2
7*,2**
2*,3**
8*,2**
2*,4**
2*,5**
*Mary’s payoff, ** Bob’s payoff
Statement 1: Non-cooperative Nash equilibrium is the economists favorite solution
to use in games because you can always find a single predicted outcome to any
situation.
Statement 2: When we say that a player has a “Dominant” strategy, we mean that
no matter what his/her opponent does, that player will always make the same
choice.
a.
b.
c.
d.
Statement 1 is true, but 2 is false
Statement 2 is true, but 1 is false
Both are true
Both are false
Alice picks columns D, E, or F
Bob picks
Row A, B, or C
D
E
F
A
8*,12**
7*,2**
8*,3**
B
12*,7*
10*,4** 15*,5**
C
10*,8** 12*,6** 14*,9**
* Payoff to Bob, ** Payoff to Alice
Alice and Bob are playing the game described in the table below. Bob picks the
rows (either A, B, or C, while Alice picks the columns (either D, E, or F). Use
concepts from class to pick the likely outcome of this game if their choices are
made non-cooperatively and simultaneously.
a.
b.
c.
d.
e.
Bob will pick B and Alice D
Bob will pick C, and Alice F.
Bob will pick C and Alice E.
Bob will pick A and Alice D.
None of the above are the solution to this problem
Bob and Alice are going to play the non-cooperative sequential
game described below. Bob picks first choosing A or B. Alice picks
second, picking C or D. After Alice picks, Bob gets to pick once
again, choosing either E or F. Payoffs marked with * are for Bob
and ** for Alice. What is the likely outcome of this game
according to concepts discussed in class?
Bob
C
Alice
Bob
A
E
10*,6**
F
8*,20**
E
6*,15**
F
7*,33**
D
Bob
Bob
B
Alice
8*,1**
C
F
D
* Payoff to Bob, ** Payoff to Alice
E
Bob
4*,2**
E
9*,4**
F
2*,16**
Statement 1: “In a two-player, simultaneous-choice game if
strategy A is better for every possible choice of your opponent
than strategy B, then we say that you have a dominant strategy.”
Statement 2: “If there are no dominant strategies, and no
dominated strategies in a game, then there will always be a single
Nash equilibrium outcome to help predict what will happen.”
a.
b.
c.
d.
Statement 1 is true, but 2 is false
Statement 2 is true, but 1 is false
Both statements are correct.
Neither statement is correct
Statement 1: “In the ‘casino night’ story from Dixit and Nalebuff
by the last spin of the roulette wheel in the evening Barry had
$700 and Eva had $300. Sine the money amounts were
significant only if you had the most at the end of the evening,
Barry’s best strategy was to wait for Eva to place her bet, and bet
the same amount on the same event.”
Statement 2: “In the ‘casino night’ story mentioned above, Eva’s
best choice was to put her $300 on a multiple of 3 so that she
would receive $900 if she won. Realizing this she should place
her bet immediately and hope Barry didn’t know how to respond.”
a.
b.
c.
d.
Statement 1 is true, but 2 is false.
Statement 2 is true, but 1 is false..
Both statements are correct.
Both statements are false.
Bob’s Choices
Edna’s
Choices
A
B
C
D
42* / 29**
31* / 40**
45* / 50**
E
31* / 16**
42* / 51**
55* / 28**
F
32* / 28**
19* / 38**
42* / 48**
*Money received by Edna; ** Money received by Bob
Which of the following statements best describe the situation in the
simultaneous choice game depicted above?
a. Strategy F is a dominated strategy for Edna, while strategy A is a dominated strategy for Bob.
b. Strategy E is a dominated strategy for Edna, while strategy A is dominated strategy for Bob.
c. There are no dominated strategies in this game.
d. Strategy F is a dominated strategy for Edna, while strategy c is a dominated strategy for Bob.