INTRODUCTION TO STRATEGIC REASONING

interactions and do so with two objectives. One objective is to understand the manner in which people behave—why they do what they do. If you’re a social scientist—such as a psychologist or an economist—this is your job, but many more people do it as part of everyday life. Homo sapiens is a naturally curious species, especially when it comes to each other; just ask the editors of People and National Enquirer. Our second objective is motivated not by curiosity, but by ne- cessity. You may be trying to resolve a conflict with a sibling, engaging in a sporting contest, competing in the marketplace, or conspiring on a reality TV show. It would be useful to have some guidance on what to do when interacting with other people.

In the ensuing chapters, we’ll explore many different kinds of human en- counters, all of which illustrate a situation of strategic interdependence. What is strategic interdependence? First, consider a situation in which what one person does affects the well-being of others. For example, if you score the win- ning goal in a soccer game, not only will you feel great, but so will your team- mates, while the members of the other team will feel lousy. This situation il- lustrates an interdependence across people, but strategic interdependence is something more. Strategic interdependence is present in a social situation when what is best for someone depends on what someone else does. For ex- ample, whether you kick the ball to the right or left depends on whether you think the goalkeeper will go to the right or left.

The presence of strategic interdependence can create a formidable chal- lenge to figuring out what to do. Suppose Greg and Marcia arrive at a museum together, but are later separated. Because Greg’s cell phone battery is dead, each must independently decide where to meet. Since Greg wants to go where he thinks Marcia will go, he needs to think like Marcia. “Where would I go if I were Marcia?” Greg asks himself. But as soon as he begins thinking that way, he realizes that Marcia will go where she thinks Greg will go, which means that Marcia is asking herself, “Where would I go if I were Greg?” So Greg doesn’t need to think about what Marcia will do; he needs to think about what Marcia thinks Greg will do. And it doesn’t stop there. As portrayed in FIGURE 1.1, each person is thinking about what the other person is thinking about what the other person is thinking about what the other person is thinking. . . . This prob- lem is nasty enough to warrant its own name: infinite regress.

Infinite regress is a daunting property that is exclusively the domain of the social sciences; it does not arise in physics or chemistry or any of the other physical sciences. In their pioneering book Theory of Games and Economic Behavior, John von Neumann and Oskar Morgenstern recognized the singu- larity of strategic situations and that new tools would be needed to conquer them:

The importance of the social phenomena, the wealth and multiplicity of their manifestations, and the complexity of their structure, are at least equal to those in physics. It is therefore to be expected—or feared—that mathemati- cal discoveries of a stature comparable to that of calculus will be needed in order to produce decisive success in this field.1

Game theory provides a method to break the chain of infinite regress so that we can stop banging our heads against the wall and say something useful (assuming that we haven’t banged our heads for so long that we’ve lost any ca- pacity for intelligent thought). Showing how game theory can be used to ex- plore and understand social phenomena is the task this book takes on.

1.2 A Sampling of Strategic Situations 3

1.2 A Sampling of Strategic Situations SINCE ITS DISCOVERY, game theory has repeatedly shown its value by shedding insight on situations in economics, business, politics, and international rela- tions. Many of those success stories will be described in this book. Equally ex- citing has been the expansion of the domain of game theory to nontraditional areas such as history, literature, sports, crime, medicine, theology, biology, and simply everyday life (as exemplified by the chapter’s opening monologue). To appreciate the broad applicability of game theory, the book draws examples from an expansive universe of strategic situations. Here is a sampling to give you a taste of what is in store for you:

Price-matching guarantees Surf on over to the website of Best Buy, and you’ll see the following statement: “If you’re about to buy at a Best Buy store and discover a lower price than ours, let us know and we’ll match that price on the spot.” A trip to Circuit City’s website reveals a similar policy: “If you’ve seen a lower advertised price from another local