Recommended reading (4): Thinking strategically (or its sequel)

   I belong to the generation of (past) economics students who did not have a game theory course offered in the undergraduate curriculum. Hence, for all the game theory I know, I learned it either from graduate school or through self-learning. As I have explained in a past post, what we have learned earlier may have an unexpectedly high influence on our knowledge. I also suffer from this starting-point difficulty: I never think my understanding in game theory is good enough, at least not as good as my understanding of economics in other fields. Of course, it is not an excuse to blame your schools for what you are not taught. Otherwise, my students can also blame me without resorting to self-learning. Unfortunately, in graduate school, game theory is again not my major area of research. The result is that I always think that game theory is one of my weakest link.
   For this reason, I hesitate to recommend any game theory books to you. This is of course not ideal as the theory has now occupied a very important role in economics. Furthermore, due to its values in business and many other areas involving competition (including military), the theory is currently one of the most well known part of economics among common people. Nonetheless, I cannot recommend books to you if I don't really like it. Actually, I didn't read many game theory books for the reasons mentioned above.
   Fortunately, I did read a game theory book that fascinated me very much, and I think this is really a very good book for learning some game theory informally. It tells stories but is also of high quality from an academic viewpoint. I am very much willing to recommend you the book written by Avanish Dixit's and Barry Nalebuff's Thinking Strategically. In fact, I guess my recommending words can be applied in another book of the same authors, The Art of Strategy. Dixit and Nalebuff originally wanted to write a revised and expanded edition of Thinking Strategically. However, eventually they come up with a new book as so many new stuffs have been written. But you can see: the second book is basically written with the same intention as the first: introducing game theory with useful and interesting real cases documented. Thus, I guess the second book is also recommendable. However, I haven't read the second book yet. As such, in this blog, I formally only recommend the first one. But you can try the second.
   The academic status of Dixit and Nalebuff is very high. Dixit knows (and is good at) almost every field in economics, including of course game theory. He was also a visiting professor at Lingnan University. Nalebuff is an authoritative game theorist. Hence, there is no doubt about the academic quality of their works. What is surprising is, however, that they know so much about applications and real world examples. Reading this book is surely enjoyable though some parts of it would need you to pay attention and think.
   This book shows you that game theory can be applied in so many different areas, not only for economic or business area, but also, sports, politics, and military areas, etc. Hence, it will certainly widen your perspective. I was particularly impressed by two parts of it.
   In game theory, there is a term called mixed strategy. Strategy is normally about an action plan: when something happens, you do this; but when something else happens, you do that. Mixed strategy is more complicated. It involves choosing a probability such that you do something at a chance and do some other things at other values of chances. Students who are enrolled in a game theory course will all be taught this concept. We can understand it but we may simply consider it as a formal concept and not to treat it very seriously. Dixit and Nalebuff told us that mixed strategy can be very practical. For example, in basket ball games, players may take action not at a fixed direction but do something at a chance to confuse their rivals. You can imagine this strategy is of course very useful in sports games: your fixed action may be easily detected by rivals and this lead to loss. So, you have to randomize.
   Another impressive stuff is about brinkmanship: it is about deliberate creation of risk. Yes, it is to deliberately create risk although normally most of us don't like risk. The creator of risk also does not like risk but sometimes creating it can gain certain strategic advantages. Well, it sounds not so intuitive but reading the book will let you know why this is so. Brinkmanship is a very realistic thing especially in these years: the North Korea crisis is actually an example of brinkmanship perhaps created by both sides, North Korea and US. Crisis happens on and off in the real world. If you understand brinkmanship as a strategy, you might be able to help yourself figure out what really happens and stay calm. Whatever you want to do, managing investments or simply seeking a peaceful mind, the knowledge about this is important.