Most of us were kids once.  I think I was a kid once, but my memory is fuzzy.  I do remember playing the card game “War.” Nice game, but suppose if you were dealt a weak deck you had the option to look at the opponent’s deck, and stack yours to meet the challenge.  That would be a sharp example of how game theory could be used to defeat a stronger player.

This book is a little further afield than I usually go, because this is not an economics or finance book in the traditional sense.  The Predictioneer’s Game describes using game theory to solve complex problems, and possibly, affect the results in your favor, or, the favor of your client.

The author, Bruce Bueno de Mesquita is a professor of political science at NYU, and a senior fellow at the Hoover Institution.  Though he uses game theory in his academic work, on the side, he uses game theory in his own firm to analyze tough policy, business, and legal questions.

His methods are simple and complex.  Simple, because the math at first glance isn’t that difficult, but complex, because many different iterations of the simple model must be considered using a computer.  Often the answer that the computer spits out is a surprise that reveals that there is a clever strategy to achieve an unusual result.

There are many elements that go into building such a model.  It begins with designing the question in a way that facilitates sharp opinions from experts.  The experts name all of the parties that have an interest in the outcome, and:

• What their desired outcome is.
• How motivated they are to achieve their desired outcome.
• How influential can they be with other parties in the dispute.
• How much they want an agreement, even if it is not their favored outcome.

The experts rate all of the parties on those variables on a scale of 0 to 100.  Then the math starts, analyzing what sorts of coalitions can develop to come to an outcome that satisfies those with the most influence and motivation.

Now, I don’t buy in entire his view that everyone is strictly motivated by self-interest.  I have adopted five children, in addition to having three with my wife.  Yes, we wanted a large family, but we would have been happy with fewer.  We saw this as something good for society on the whole, as well as the church, which made us more willing to adopt.  If we are going to argue that a person having love for their culture or for their church is an expression of self-interest, then please tell me what would be self-disinterest.  To use an example from the book, I have mixed feelings about “Mother Teresa,” but I have little doubt that she did what she did out of devotion to the Catholic Church, and not out of self-interest.

That said, until proven otherwise, assuming any party is entirely self-interested is probably correct to a first approximation, which is why game theory is so applicable to complex problems.

Bruno de Mesquita has quite a track record according to the CIA:

Since the early 1980s, C.I.A. officials have hired him to perform more than a thousand predictions; a study by the C.I.A., now declassified, found that Bueno de Mesquita’s predictions “hit the bull’s-eye” twice as often as its own analysts did.

As a result, I tend to believe his claims as he goes through the book.  He has helped solve some tough political and business problems. Most of the examples in the book fall into legal or political categories, though there are a number of examples for the business world: CEO succession (funny), merger negotiations, and how to buy a new car.

The last will pay for the book on its own.  I have used the technique twice before, and it works.  That said, that I have used it twice before means it is not unique to the author.  (For those buying used cars, I have another approach.)

Now, the author offers the opinions of his models on:

• What will happen in the global warming negotiations?
• Will Iran develop a nuclear bomb?
• Will Iraq and Iran develop an alliance?  (Note: there is no explicit mention of the Saudis in this discussion, which I think is a major miss.)
• Will Pakistan continue to cooperate with the US in the “war on terror?”

Good questions all, but I would ask the following questions:

• How will the various nations of the world fare through the coming demographic crises?
• Will the US Government pay off its debts in real terms, or will they inflate the debts away?
• Will the US Dollar remain the global reserve currency?  If not, then for how long?
• When will the Communist Party lose control in China?

Perhaps the author could favor us with some answers, but regardless, I recommend the book to all that have interest in predicting the outcomes of complex situations.

Who will benefit from the book?  This is a book that many will benefit from, because the subject area is broad, and the ability to turn the windmills of the mind are considerable.  For those who want to buy it, they can buy it here: The Predictioneer’s Game: Using the Logic of Brazen Self-Interest to See and Shape the Future

Full disclosure: my goal is to have alignment of interests between me and my readers.  I don’t want any of my readers buying something only to benefit me.  But if you want to buy something at Amazon, please enter it through my site — you buy at the prices that you like, and I get a commission.  I like the fact that my readers get what they want at no additional cost as they aid me.  I look for win-win situations, and this is one of them.

This entry was posted on Tuesday, October 27th, 2009 at 2:06 am and is filed under Book reviews, Macroeconomics, Quantitative Methods, public policy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.