By Bhagwad Jal Park, on March 17th, 2009
I’m a big fan of TV series like “24″ and “Lost”. My wife and I eagerly watch episode after episode and get completely involved in the characters and the storyline. In fact, we begin to identify with each character and their mannerisms to the extent that we “latch” onto the main figures. We would give way to howls of outrage if say Kiefer Sutherland who plays “Jack Bauer” were to be replaced by someone else!
Image Credit: TCM Hitchhiker
My greedy Game Theory mind immediately latches onto this scenario as a means to extort money out of Television Series producers. In my earlier article on the benefits of holding back patents, we discussed the problem of holdups. Holdups are situations where party A has the potential to cause massive damage to party B after the initial assessment has been made and work set in motion.
In the case of patents, this meant that if you have invested millions in making a factory, then I can hold you up by acquiring a patent on a crucial process that is mandatory with your current setup. In the case of the TV series, this means that an actor like Kiefer Sutherland who has already been ingrained into the hearts and minds of millions of fans, has the ability to hold up FOX networks. Each series has 24 episodes. Suppose after the 10th episode, Sutherland demands a 300% raise from FOX, he would be holding up the network.
The key element here is that Sutherland is irreplaceable as “Jack Bauer” and that after airing 10 episodes, a substantial investment has already been made. These two factors are critical for any holdup and not just with TV Series.
It’s useless to say that FOX has a contract with Sutherland, and that Sutherland will forced to continue acting at a pre-arranged rate. Acting is an art, and Sutherland’s “performance” can just drop, he can lose the special way in which he says “You gotta trust me on this!”, or he can just come down with an inexplicable fever. There are many ways in which he could execute a holdup without breaking his contract.
So why doesn’t he? I guess there are two reasons. One, Sutherland may be a “good guy” and not greedy. Fortunately, as we say earlier, all humans are not rational. After all, he’s an actor and not a game theorist! Second, his reputation will suffer irreparable damage if he were to indulge in this kind of behavior. Assuming that Sutherland wants to pursue an acting career after the series gets over, it’s in his best interests to be a “good guy” and stick to the contract. In other words, a “repeat game” ensues.
But if Sutherland wanted to just amass one time wealth and live out the rest of his life in luxury, there would be nothing to stop him from holding FOX to ransom for huge sums of money. This means that TV networks should also be careful of actors who are getting old and are thinking of retirement. These actors have nothing to lose by their reputation being damaged, and can capitalize on their years of being decent by one massive holdup were they to ever get a chance! It short, never trust an old fart.
I can imagine that in the future, virtual actors will eventually replace real ones, and not just because they’re cheap, but because holdup problems can be averted. After all, virtual actors are your slaves and don’t have an agenda of their own. Given this inevitable future, I would be very worried if I were an actor just starting out, since my future is at stake. If everyone thought like this, then there would be a shortage of young actors and the asking price for young actors would go up…….
But no one thinks that far. Not young actors anyway. So don’t expect a shortage anytime soon. But the future of the TV industry is definitely set for a change. You can bet on that.
By Bhagwad Jal Park, on November 7th, 2008
Today, we are going to discuss an interesting phenomenon in the world of game theory: namely, adverse selection. Frequently, game theory attempts to isolate and analyze curious phenomena and detect the essential elements that make it work. We can then try and manipulate these element to steer the game in a chosen direction.
The phenomenon of adverse selection occurs when several people are trying to obtain a particular goal, and the criteria which make the person either suitable or unsuitable to obtain that goal from the point of view of the entity and from the person trying to obtain it are diametrically opposite.
Let us take the example of a company who is trying to project to the world that only the most stylish and fashionable people wear their watches. To accomplish this, it decides to selectively sell their watches only to the most fashionable people in the world. From the point of view of the watch company, the people who must wear it must be really stylish and fashionable. However, the people who will most want to wear the watch will be wannabes. The wannabes will benefit most from the watch since, if they have the watch, they will be projected as stylish and fashionable. Hence, the watch company must be very suspicious of anyone who desperately wants to wear the watch.
Those who are really stylish and fashionable will not want to wear the watch so badly since their reputation is already made and they gain little from wearing it.
Adverse selection is characterized by the fact that people who most want to obtain something are typically the least worthy to have it.
Image Credit: stark23x
This manifests itself beautifully in the case of insurance companies. Regardless of what anyone says, insurance is essentially gambling. Insurance students will cut my throat out for saying this, but when all the smoke clears, it’s pretty obvious that when you take out an insurance, you’re hedging your bets.
Since insurance companies want to maximize their profits, they will want to have the odds stacked on their side. This means that they will want to give insurance to people who are least likely to demand a payout from them. On the other hand, those who most badly want insurance will be the people who are most likely to demand a payout.
A person who is old and has several ailments would love to have cheap insurance, whereas a young man in perfect health will have less to gain. However, insurance companies want the young man to sign up for insurance and not the old person. This is adverse selection in its most characteristic form.
It’s actually somewhat tragic. Giving insurance only to those who don’t want it completely defeats the purpose of insurance from the customer’s point of view. What’s the big idea of refusing insurance to those who need it most? That’s like selling pizza to a person who isn’t hungry! However, adverse selection doesn’t apply in the case of pizza.
Since insurance companies don’t play fair by testing people and even excluding some people from insurance based on their riskiness, the people who want insurance are perfectly justified in trying to fool the insurance companies by hiding their ailments. It’s a dance, and the outcome all depends on whether the insurance company can discover the hidden ailments of the person or not.
There is no stable solution to this. In other words, no Nash equilibrium exists. One of the parties will always wish that they had – or didn’t have – insurance, or the insurance company will always wish that they had – or didn’t have – a certain person’s business. A zero sum game. In the end, both parties can be happy only if they assess the situation differently. That is, each thinks that they have outwitted the other.
By Bhagwad Jal Park, on October 30th, 2008
Can you imaging inventing something new and refusing to patent it? We game theorists are a greedy lot. While not doing anything actually illegal, we show no mercy when it comes to an opportunity to make lots of money. In this latest nefarious article, I am going to demonstrate how it is in your best interests to keep silent about your latest invention when it suits you.
First we must understand a key concept in game theory called a “holdup.” A holdup is a situation where you are able to demand almost any amount of money from a person because they have no choice but to pay you or suffer incredible losses. This isn’t just restricted to extorting money at a petrol bunk. Holdups are frequently seen in businesses.
For example, suppose all the pilots in a particular airline decide that they’re not getting paid enough. All they have to do is to go on a collective strike and ask for a 300% raise. Assuming that there are very few pilots around, such a strike will have a compelling power. The reason is twofold. First of all, being a pilot is a specialized skill. And second, the cost of paying a pilot is minimal compared to the cost of maintaining an airplane. So if the airline stops operating because of the pilot strike, they can hardly save any money by not paying the pilots since their fixed costs on machines, etc., is sky high anyway. The pilots are trying to “holdup” the airline company.
Image Credit: Ismael Olea
In fact, the threat is so real, that certain governments have imposed rules on how long skilled labor such as pilots can go on strike.
Such a strike would not work in McDonald’s for the reasons mentioned. The labor is pretty unskilled, and a strike would hurt McDonald’s much less since McDonald’s would save on employee fees which are pretty high. So if the employees threaten to strike (remember that the more people who strike, the more difficult it is to maintain the strike since a strike is like a cartel), McDonald’s would simply fire them and hire more workers since they are easy to replace. Thus, an attempted “holdup” of McDonald’s would not succeed.
Patent law gives inventors the potential to holdup companies that rely on the patent. Wouldn’t it be nice if I had a patent on the technology used to create integrated circuits (IC)? Every single chip company in the world would pay me money, and I would be a rich man with no worries (financially at least).
But suppose I’m a manufacturing company, and I have several ways to manufacture a particular product. I must check beforehand whether any of the steps involved in a particular method have a patent on them. If they do, then I must either come to an agreement with the patent holder to pay her a reasonable sum of money before I Invest heavily into it or choose another method.
If I’m foolish enough to blindly set up my manufacturing plant in a way that utilized a method that has a patent on it, the patent holder can holdup my firm. They can demand outrageous fees for allowing me to utilize that method since it will cost me millions of dollars to set up a new plant that avoids that step.
But suppose I do the research beforehand and find that no one holds a patent for a particular step, and I build my factory around it. After this, a clever inventor reveals that he has just now got a patent for a particular method that my plant utilizes, and I’m screwed. The crafty inventor had purposely delayed his patent on that technique so that when I did a check, nothing showed up. Now after my plant is complete, he has completed the process and obtained a patent. He is now in a position to hold up my firm.
So if you’re thinking of obtaining a patent, it is worthwhile for you to hold off a little bit and wait till a firm invests heavily into a product or process which utilizes your invention. Then you must strike and obtain a patent and keep holding up the hapless firm! I can well imagine professionals having dozens of unpatented inventions, keeping a keen lookout for an opportunity to pounce on a company that will utilize one of their inventions.
Yes, we game theorists are crafty. Nothing wrong in that, is there?
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By Bhagwad Jal Park, on October 21st, 2008
As an impartial observer, I’ve often wondered why, when I go to a restaurant in a group and order a dish, do they bring my order along with everyone else’s, and then serve my food that I ordered to everyone on the table! For example, if I order six dumplings, and there are six people in the group, the waiter will casually give each person a dumpling, and I get only one. Whereas I ordered six thinking that I would eat all of them. As a result, my hunger is not satiated.
Also, if I want to eat well, I must have the dishes that others have ordered which I may not like. My wife says that this is good etiquette, and that my not understanding this simple fact highlights my lack of social graces. As a person with a suspicious mind however (and a game theory one at that!), I have a different take on the issue.
When a group goes to a restaurant, either they all share the bill equally or each pays for themselves. It is considered less awkward and simpler if the group (all things being equal), split the bill equally. This means that as an individual, when I want to order something on the menu, the price of whatever I order drops proportionately to the number of people on the table. For example, if an item I want (say king prawns) costs $50, then I will only have to pay $10 if my group has five people.
Now I have no control whatsoever on what other people order. By not ordering anything expensive, I can’t guarantee that others will do the same. Therefore, it is in my best interests to order everything I want without looking at the price since I will never again get an 80% discount! True, others may share my meal, but in an expensive restaurant, you’re usually not paying for the raw materials of the food itself but for the ambiance, the nicely dressed waiters, etc.
Image Credit: Matt and Kim Rudge
Since we assume that each person in the group is rational and is thinking just like me, they will order expensive things too, and so the total bill turns out to be extremely high. A variation of the prisoner’s dilemma actually.
Of course, if it was decided beforehand that each person will pay for what they order, then I will be much more circumspect about what I decide to eat. I can’t afford to pay $50 for 5 shrimps!
Knowing this, it is in the restaurant’s best interests to ensure that everyone shares the bill equally, since only then will each person go berserk with their orders. Therefore, they must operate in such a way that it becomes very difficult to gauge who has eaten what.
One of the ways to do this is to serve everyone’s dish to everyone under the cloak of “etiquette”. In fact, I won’t be surprised if they invented the practice in the first place since and started calling it Good Manners. Good Manners it may be, but it’s also good business sense.
Of course, if you’re a greedy person and want to sample expensive food that you would never normally eat, you must get into a group of people you don’t know very well and who are not very well off. You must then convince them to go to an expensive restaurant so that you will be the only one to order expensive food and make them share the bill. I would assume you can only do this a couple of times before your group started to feel the pinch.
Sometimes however, a person’s personality can be so captivating and charming that others forgive them. Or say you’re a beautiful woman in the company of four men, they will not only forgive you, but fall all over themselves in fighting over your bill. You can then show how independent you are by paying “your share,” when actually you’ve shifted over all the expensive food’s cost to your lackeys!
By Bhagwad Jal Park, on October 3rd, 2008
Piracy, it has been claimed, causes the loss of billions of dollars worldwide. I’m not about to launch into a discussion of whether or not that is true (perhaps another day?), but one thing has always bothered me: why doesn’t Microsoft (a good example) stop piracy of Windows, once and for all?
It’s easier than you might think. A company that has amazing technological and financial resources at its command should actually find it quite a trivial matter to simply enforce over the Internet the policy of a unique copy of Windows being installed on just one computer. I believe it can certainly be done. Why then has it not happened?
To answer this, we need to understand the facts about something called “network externalities.” In game theory, the term “network externalities” relates to the phenomenon of something becoming more valuable simply because more people use it. Since it’s more valuable, even more people use it, and it is, therefore, a self-propagating mechanism.
Image Credit: purprin
For example, the telephone is an amazingly useful piece of technology. But how would you like to be the only one having a telephone? I’m betting you wouldn’t. Who would you call? Who would call you? Without other people having a telephone, the instrument is worse than a paperweight! The more people who have a telephone, the more people you can call and who can call you back. The value of the telephone increases simply because more people use it.
This means that products that have network externalities associated with them and have a large user base might completely wipe out the competition even though their product is of a poor quality. Since the value of a product can increase due to the number of people using it and not because of its inherent quality, a dominant product can get away with having a worse product than the competition.
Let’s take the case of Windows. Most people install Windows on their PCs. Why? One major reason is that there is a lot more software that is written for Windows than for, say, Linux or the Mac OS. Why is there more software for Windows? Say I’m a developer and I’m just going to start writing code for my new software. Should I write it for the Windows platform or for another one? If I write it for, say, Linux, then no one using Windows can use my software. Since the overwhelming majority of people use Windows, I would get a better payoff if I wrote my software for Windows because there are more chances of people buying it.
So the more number of people who use Windows, the more software there is out there for it, and, therefore, when I purchase a new computer, I would choose one that has Windows running on it because of the larger amount of software available for it.
Windows has a dominant market leadership in the OS world simply because it has a dominant market leadership! Such is the self-propagating nature of network externalities. Now let’s assume that Microsoft stops piracy completely. Almost all of India, China, and other Asian countries would be forced to use another software simply because, in these countries, the price of Windows is too high for almost anyone to purchase. In India, people would maybe buy Windows if they could purchase a copy for Rs. 200. That means $5! You think Microsoft is ever going to sell Windows for $5? No way.
So now that half the world has stopped using Windows since there is no more piracy, Windows has lost the only advantage it ever had – a dominant market leadership. When half the world starts using Linux, for example, then more developers will write software for Linux, and so even more people would buy it. It might happen that Windows will never recover from this shock (since you cannot improve your position unless you improve your position – a catch-22 situation).
This is the real reason why Microsoft will never stop piracy. They know that if they do, then half the world will stop using Windows, and they figure that, if that happens, they’re doomed.
By J.C., on September 22nd, 2008
In response to my last post regarding health insurance companies, I received a comment from a physician who noted that health insurance companies try to make it difficult for doctors to collect payments. I could not agree more. It is the classic example of a big business trying to take advantage of the little guy.
Any regulation scheme that is added to a system adds additional layers of costs. When health insurance companies demand a certain format for billing submissions, this requires the physician’s office to either outsource their billing to a third party vendor with expertise in billing, or it requires the hiring of a skilled biller in the office. Both of those options essentially add the equivalent of another person to payroll. If you think you can find an administrative assistant or a medical assistant with skill in billing, then you are wrong.
Health insurance companies are aware that they are the 800 pound gorilla and can push around the small doctors. They have several strategies to prevent physician reimbursement. One easy strategy is to simply not pay claims at all or in a timely manner. A large percentage of claims go unpaid this way because doctor’s offices simply do not have the manpower to chase down unpaid bills. Sometimes the insurance company will simply deny payment and request additional documentation. You can imagine that a typical doctor’s office doesn’t have the time and energy or the infrastructure to track down and reconcile their billing.
Perhaps the most treacherous tactic by insurance companies is to pay less than the physician requests. For example, the doctor will bill out $100, and the insurance company will pay $20. There is no recourse for the physician other than to accept the payment or just stop doing that service for his patients. When health insurance companies offer you cheap insurance quotes, don’t be naive and think that they aren’t taking advantage of the doctors.
I like to relate this whole concept as a scam in which you provide service first but do not get paid. In any other industry this would be unacceptable. Non-payers would quickly go out of business because they would get the reputation for not paying and people would cease to do business with them. Unfortunately, there is collusion in the health insurance system, and there are not that many payers. There is no competitive process as everyone is pegged to Medicare rates.
By Bhagwad Jal Park, on September 12th, 2008
We learned a few pricing strategies in a previous article about how to make customers self-select and get them to pay as much as they are willing to pay for your product. However, it assumes that all of your customers value your product equally. In reality, your product will be valued differently by different people.
Let’s assume you’re selling jeans and business trousers. The trousers will be of lesser value to a teenager and the jeans, say, will be of lesser value to an office-goer. Ideally, you want to be able to sell to both of these people. But if you set a high price for jeans, then the office-goer will not buy it, and if you set a high price for the trousers, then the teenager will not buy it.
As usual, our most direct strategy will never work. Namely asking the customer what they are willing to pay for it! No. We crafty game people need a more subtle approach.
So what are we looking for in such a strategy? We want to arrange things in such a way that both the office-goer and the teenager will buy both products for as much as they are willing to pay for each. To illustrate this, we need to plug in some numbers.
Jeans – Value to teenager: 100. Value to Office-goer: 50
Trousers – Value to Teenager: 50. Value to Office-goer: 100
Image Credit: inju
Ideally, we want the teenager to pick up both the jeans and the trousers for 100 and 50 respectively, spending a total of 150. We want the office-goer to buy the jeans and the trousers for 50 and 100 respectively. We want both to spend 150, and we want to net 150+150 = 300.
Clearly setting a single price for the garments isn’t going to do us any good since then either the teenager or the business person will end up either not buying it, or paying a lower price than they are willing to pay for it. The strategy to follow is that of bundling.
Bundling means that we package both the garments together and sell the bundle for 150! We wrap them nicely in a plastic bag and indicate that the two are inseparable. Now both the teenager and the office-goer can buy the bundle for a price of 150, paying as much as they would normally be willing to pay for each item. Our net gain is 300, and the office-goer as well as the teenager need never know of our clever manipulation.
There are several instances where certain items are worth different values to different people, and in situations like this, bundling can be very effective. If you remember the days of Nintendo, you would see (and you still do) cartridges that have something like 10,000 games in 1 at a reasonable price. How was this possible? The idea was that some people like certain games more than others. The best way to sell them was to put all the games together and hope that there will be something in the bundle for everyone. Selling them separately meant that almost no one would buy each game individually, but by bundling them, you ensure that you sell all of them.
This approach really works well for software since it is so easy to replicate. For bundling to work, you need to be able to manufacture the goods cheaply as well as have the goods be of varying worth to different people. When used properly , it can be a very effective strategy even for physical goods, just like the jeans and trousers example above.
By Bhagwad Jal Park, on August 27th, 2008
I don’t count myself as a visionary, but there is a specter looming over mankind’s collective head, and I’m not sure if I can see how we can avoid it.
In my opinion, creating good artificial intelligence is just a matter of time. Already researchers have created a robot that uses a rat’s brain, and the future consists of computers that can think just as we do. The field of robotics is also growing rapidly, and powered by a human brain, we can have robots that walk, talk, and comprehensively pass the “Turing Test”.
Now I’m going to make the following assumptions:
- A time will come when a robot’s capabilities will outstrip those of humans.
- Robots will steadily become more and more affordable.
It’s important to understand that I’m not suggesting that robots will take over the human race. Surely we are not so stupid as to allow that possibility. We can always ensure laws like the “Three Laws of Robotics” are in place before allowing the robots any sort of autonomy. I’m still firmly insisting that the robots will not be “Conscious” and cannot have a will of their own. At least not in this article.
Image Credit: Vaguely Artistic
The first thing that will happen, given the above assumptions, is that corporations will lay off their employees and use robots instead. The forte of humans lies in their capacity for judgment. All other repetitive work can be delegated to simpler machines. But once robots can replicate that as well, the need for humans vanishes. Robots are preferable to humans because
- You do not have to pay them a salary. Only their running and repairing costs.
- I’m assuming that the knowledge of one robot can be easily transferred onto another thereby obviating the need for the lengthy training that humans need.
- Easier to manage, no ego hassles, etc.
So the first results of artificial intelligence will be massive layoffs. The corporations will do this because market forces will pressure them into doing so. However, when more and more companies lay off their workers and replace them with robots, who will have the money to buy their products or services when everyone has lost their jobs?
It’s like the Prisonner’s Dillemma. Each company will be forced to do the rational thing by hiring robots, but collectively they doom the economy to destruction. End of first stage.
Act two. As robots get cheaper and cheaper, everyone will find a way to own their personal robot. This robot will be like Jeeves on steroids. It will do all the chores, cut your hair, and mend your clothes. I’m also assuming that it will have the sum total of all human knowledge in it’s head and infinite dexterity in it’s fingers. Given this, it will probably make clothes for you, grow your food, and take care of every other small convenience that you would normally have paid for. This is very important because you must remember that no one has money or a job thanks to the logic in Act 1.
 Image Credit: potarou
To complete the loop, robots will be able to power themselves by building their personal dynamo or some such device.
So the stable outcome will be:
- Everyone will own a robot.
- Occupations like tailors, lawyers, accountants, and even doctors will disappear.
- People can just sit at home and let their robots take care of them.
In my opinion, certain services that robots cannot supply like amusement park rides and movies will still be provided for by corporations, but they will be free! What’s the point of charging money? They will anyway be run by robots, and what will people do with money? No need to buy anything as robots will provide everything for us.
I’m fairly sure I’m not getting the complete picture here. I get the nagging feeling that I’m missing out on some other consequence that I can’t yet put my finger on.
What do you think?
By Bhagwad Jal Park, on August 13th, 2008
Setting a price on your product or service can be one of the most difficult decisions a marketing manager can make. Different people value your product differently. Most of the time, it is impossible to get accurate information regarding the percentage of your target market that are willing to pay a certain price for it.
However, even with perfect information, the pricing question can be very vexing. Say you know full well that 30% of the population is willing to pay a substantially higher price for your product. Setting the value at this higher price means that you lose out on the remaining 70% of your market who are not willing to pay that price. Setting a lower price means that you have wasted the spending power of that 30% who will now pay a lower price than what they were willing to pay.
What we need is a way to charge a higher price for those who are willing to pay more, and a lesser price for those who are willing to pay less. Simply ask each customer how much the product is worth to them, and charge them on that basis!
However, your customers might throw a fit if they realize that they are being charged simply because they are willing to pay more. No one likes to feel that they are paying more than another person who is getting the same service. In addition, customers will have a strong incentive to lie. Just because I’m willing to pay a high amount for a service doesn’t mean that I wouldn’t like to pay less for it.
The way to achieve this differential pricing is to identify customers who are willing to pay less for your product based on their behavior and charge less when you observe that behavior being followed.
Image Credit: washed up
One example is computer gadgetry. When a new computer gadget comes out, those who will only pay a lower price for it (the cheapskates) will not buy it immediately. When it comes to computer gadgets, cheapskates always feel that the prices will come down several months later. Therefore the best strategy for a company that is bringing out a new computer gadget is to charge high prices when the product comes out and deliberately lower those prices for the cheapskates later on.
Those who pay a high price for the gadgets will get bragging rights and the knowledge that they are the first adopters of the technology.
In most cases however, it is very difficult to identify the cheapskates. Fear not. Certain strategies exist that make the cheapskates identify themselves. This is called self selection. Using certain strategies, your firm can cause the cheapskates to unknowingly reveal their true colors. You can then charge them accordingly.
Image Credit: agthom
The strategy cannot be as simple as, “Whoever says that they are too poor to afford this product will get a 15% discount.” If it’s that easy, then everyone will follow it to get the discount. The idea is to make the cheapskates work for their discount. Those who are willing to pay a high price for the service are usually price insensitive and will not bother to go through the extra effort to get a lower price.
For example, several restaurants charge lower prices in the afternoon. Most people enjoy going to a restaurant in the night when they can party with their friends as part of a later plan to enjoy the rest of the evening. However, by offering lower prices at a time of the day when it’s slightly inconvenient, you invite the cheapskates to get your meals at a lower price. There’s no danger of your richest clients coming at this time simply to save a few bucks. For them, it’s simply not worth it. But you manage to get others who would not normally have come to your restaurant.
By making the cheapskates reveal themselves, you cause them to self select and are free to charge them lower prices. The self selection is always implicit instead of explicit. It’s never mentioned that lower prices are being charged for the sake of cheapskates. Pretty sneaky, huh?
By Bhagwad Jal Park, on August 9th, 2008
The poet Horace once said, “Ira furor brevis est” – “Anger is a brief madness.” This is taken to be a strict warning against getting letting your emotions run away with you. The implication is that anger is a poor alternative to logic and reason.
 Image Credit: labnol
In the book The Godfather, the village that Don Corleone comes from (the village Corleone) is populated mainly by women. Apparently, the men were all killed by vendettas. A logical person will say that such are the fruits of passion. However, insanity (anger) has undeniable advantages, as I will attempt to show.
Chicken Games
A chicken game is a special type of game where you want to convince the other person that you are going to go ahead with a certain plan no matter what the cost. The implication of this game is that if both of you take a certain course of action, it will ruin you both. However, if only one of you does it, then a reward awaits that person.
Take the example of two employees who want to ask for a raise. The boss is a guy who doesn’t like to be pushed around. So if you both ask for a raise, he’ll feel that you’re ganging up on him and fire you both. If however, only one of you asks for the raise, that person will get it.
So what can be the outcome of this game? As explained in an earlier article, stable outcomes are Nash equilibriums. So what are the Nash equilibriums in this game? There are two. The first is if only you ask for a raise. The second is if only your colleague does so. In either case, neither you nor your colleague regret the choice. If the person who didn’t ask for the raise had been bold enough to do so, then he would have gotten fired along with the other person.
Games like this are called “Chicken Games” since the question revolves around who will chicken out first while deciding whether to ask for a raise or not.
Winning Chicken Games
So if you’re in a game like this, what should you do? First, we must determine the outcome that you want. Obviously you would be most happy when you’re the only person to ask for the raise. That way, you get a raise, and no one gets fired.
Obviously there is no point in requesting your colleague not to ask for a raise. Why should he let you walk in and get the raise while he sits on his butt? However, if you could convince him that you are going to ask for a raise no matter what, then he will indeed not ask for it. If he did, he would get fired along with you, and no one wants that.
Unfortunately, you’re a reasonable person, and your colleague knows it. He knows that you don’t want to get fired. Therefore, your threat to ask for a raise even if he does isn’t credible. So how do you convince your colleague that you will ask for the raise no matter what?
The truth is, you can’t convince him. As long as your colleague thinks that you’re a cold blooded rational person, there’s no way you can convince him that you’re willing to get fired. The only solution is to make him think you’re illogical.
If you make him feel that your goal is not just to get a raise but also irrationally prevent him from getting one, then you have a credible threat. If you can convince him that you’ve put up with a low salary for too damn long and that you don’t mind getting fired (when you really do mind), then again, you have a credible threat.
Either way, you have to show your colleague that you’re not thinking straight, and that you’re not motivated solely by the money. If you can do this, then your colleague, being a rational person, will not ask for the raise since he thinks that you are going to do so no matter what.
The Catch
 Image Credit: TheAlieness GiselaGiardino²³
However, if you feel that your colleague is insane and is willing to get fired while asking for a raise, then you mustn’t ask for one! It all depends on whether you think he is rational or not. Whether he is really rational is irrelevant as long as he makes you think that he’s not. Just like it’s irrelevant whether or not you’re rational. In chicken games, appearances rule.
The only problem is, acting as if you you’re insane is not easy if you’re really sane. A truly insane person has a huge edge in chicken games because he’s not acting. Therefore, a little bit of madness goes a long way!
This is the reason why we’re all afraid of red ants. You can’t threaten them with death! They’re just not rational. They will bite you period. And that’s a credible threat.
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