Strategic Thinking & Decision Making

Session 4
Game Theory
Conflict to Co-operation

IIMB Strategic Thinking & Decision Making, Lecture 4 1

Repeated Prisoners’ Dilemma

What would happen if the game was played exactly
100 rounds?

IIMB Strategic Thinking & Decision Making, Lecture 4 2

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 Games of Conflict
• Signature characteristics
– Sub-optimal, undesirable outcomes of conflict
– Lack of communication inhibits cooperation
– Can occur in Simultaneous as well as Sequential games
– In zero-sum and non-zero-sum games
• Questions of strategy?
– Can co-operation lead to better outcomes?
– Can co-operation emerge without communication?
– How can cooperation be fostered?
IIMB Strategic Thinking & Decision Making, Lecture 4 3

Fostering co-operation

IIMB Strategic Thinking & Decision Making, Lecture 4 4

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 Prisoners’ Dilemma Tournament (1980s)
- Robert Axelrod, Univ. of Michigan

IIMB Strategic Thinking & Decision Making, Lecture 4 5

The PD Tournament
One betrays, the other doesn’t: Column Player
Defector 5 pts., Sucker 0
Computer programme
Both betray:1 pt. each
Both co-operate: 3 pts. Betray Co-operate

Betray 1, 1 5, 0
Row Player
Co-operate 0, 5 3, 3
Computer
programme

• Round robin format – exactly 200 moves.

• Cumulative score of each player over all matches determined the victor.
• 14 entries from variety of disciplines
• Results of two prelim tournaments shared with entrants.
• Only one entry: Tit for Tat strategy.
• Tit for Tat won!

IIMB Strategic Thinking & Decision Making, Lecture 4 6

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 TIT for TAT by Anatol Rapoport
• Start by co-operating
• On next move retaliate defection, or
reciprocate co-operation
• Return to co-operation immediately if other
player co-operates. Continue to co-operate

IIMB Strategic Thinking & Decision Making, Lecture 4 7

Other strategies
• RANDOM: co-operate and defect randomly
• JOSS: always defect immediately after other player defects. Sneakily
defect 10% of the time after other co-operates.
• DOWNING: estimate probability of other player’s move and choose
one’s strategy for best long-term score
• Pretend to co-operate, sneak in a defection every few moves.
• Opportunistic: never co-operate.
• Co-operate till the other player does. For any defection, reply by
defection in all subsequent moves.
• Complex computer programmes designed to detect and deal with the
‘intentions’ of the other player.
• Others…….
IIMB Strategic Thinking & Decision Making, Lecture 4 8

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 PD Tournament – 2nd Round
• Second tournament on same format.
– Finite but unknown end of each round.
• Results of first tournament publicised before inviting entries.
• Rules that could have done better were publicised.
• 62 entries.
• Lone entry Tit for Tat
• Tit for Tat won again!!!

IIMB Strategic Thinking & Decision Making, Lecture 4 9

Why did TIT for TAT win?

• Scored well with other ‘nice’ rules
• Did not fare poorly with ‘tough’ rules
• Tournament was decided on cumulative score
• Note:
– TIT for TAT did not win head on with all
– Tournament rules – cumulative scoring - helped

IIMB Strategic Thinking & Decision Making, Lecture 4 10

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 Two other rules could have done better.
TIT FOR TWO TATS and DOWNING
Why didn’t they?

TIT FOR TWO TATS was too forgiving and was easily exploited.

DOWNING started by defecting the first two times.

This pessimism was a disadvantage against tough RULEs.
Led to mutual defection with nice RULES till co-operation was
established.

IIMB Strategic Thinking & Decision Making, Lecture 4 11

Conditions for Co-operation

• Players likely to co-operate if:
– Cheating is detected quickly, correctly
– Cheater is punished
– Punishment is guaranteed, transparent, swift, and preferably
automatic
– Substantial loss of future gains from punishment
– Long-term gain from co-operation greater
– No known end to the game
– Umpire or regulatory authority enforces rules for co-operation
IIMB Strategic Thinking & Decision Making, Lecture 4 12

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 Principles for Strategy (Rapoport)
1. Envy is poisonous
2. Be nice and be tough – retaliate
3. Forgive – do not carry a grudge
4. Be transparent. Don’t be too clever

TIT for TAT built on these principles

IIMB Strategic Thinking & Decision Making, Lecture 4 13

Is TIT for TAT a robust strategy?

• Mistake or misperception can lead to vengeful
mutual defection
– Human error in figuring out other player’s intent
• Artificial setting of computer tournament
– Error of judgement can lead to echo of defection
– Unsuitable for games of short duration?

In defence of TIT for TAT?

IIMB Strategic Thinking & Decision Making, Lecture 4 14

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 Co-operation in practice
• Singapore/Dubai Duty Free pricing. Tit for Tat induced cooperation
• Application in negotiations
– Teenage siblings Rekha and Rocky cannot agree on how to share an
orange. Why?
– Interest based vs. position based bargaining
• Did the Homo Sapien survive because it could and did cooperate?
• What explains that people are living longer, healthier lives?
• Why has poverty reduced over the last 500 years?
• Why are wars are less frequent, casualties far fewer since the 2 WWs.
• Will altruism encourage co-operation?
– Are we naturally selfish, or do we have a streak of altruism?
IIMB Strategic Thinking & Decision Making, Lecture 4 15

Collusion (a kind of co-operation!)

• Explicit • Tacit
– Fostered by – Decision rules evolve
communication from observing other
– Shared decision rules player’s moves
• Promises and Threats • Coke and Pepsi
pricing in India
– Why illegal in business?
– Signalling
• FCC spectrum
auction (1980s?)
Collusion is a criminal offence AND unethical?
IIMB Strategic Thinking & Decision Making, Lecture 4 16

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 In a society…..
when is co-operation undesirable?

How to discourage it?

When should co-operation be encouraged? How?

IIMB Strategic Thinking & Decision Making, Lecture 4 17

Fostering Co-operation - 1
1. Make benefits of long-term bigger than short-term gains
– Raise the relative value of future moves
• Make relationships longer lasting
• Increase frequency of interaction
– Few vendors or many?
– Break down issues into smaller pieces?
2. Change the payoffs
• Raise cost of defection through laws or rules
• Application in tax collection, obeying traffic rules, etc.

IIMB Strategic Thinking & Decision Making, Lecture 4 18

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 Fostering Co-operation - 2
1. Teach people to care about others: altruism
• Increases the payoff of co-operation
2. Teach reciprocity
• “Do unto others as you would have them do unto you”
• Tit for Tat is not eye for an eye….!
• Does not imply unconditional co-operation
3. Improve ability to recognise….
• Players and ….
• Nature of past interactions
• Facilitates reciprocity
IIMB Strategic Thinking & Decision Making, Lecture 4 19

Applying the principles in business?

• Cooperating with customers?
– Partnership
– Negotiations
• Suppliers?
When would
– Vendor management
• Industry structure and Five Forces?
you like to
create conflict?
• Employees?
– Attrition, performance appraisal
– Culture? Innovation?
• Competitors?
– ?
IIMB Strategic Thinking & Decision Making, Lecture 4 20

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 Is the human species cooperative in
nature?
Is a central authority necessary to bring
about cooperation?

IIMB Strategic Thinking & Decision Making, Lecture 4 21

Instances of co-operation? True / False?

• Yielding to traffic on the road? TRUE
• TV channels air commercials simultaneously? TRUE
• Diwali or Christmas store promotions? FALSE
• Industry body organises a recruitment fair. TRUE
• Day zero in IIM recruitment calendar? FALSE
• Schools in a city agree to stagger starting times? TRUE
• Amul milk federation? TRUE
What factors created live and let live in trench warfare in WW1?
What destroyed it?
IIMB Strategic Thinking & Decision Making, Lecture 4 22

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 “Few people think more than two or three times a
year; I have made an international reputation for
myself by thinking once or twice a week.”

George Bernard Shaw

IIMB Strategic Thinking & Decision Making, Lecture 4 23

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