The Joy of Game Theory: An Introduction to Strategic Thinking by Talwalkar Presh

Author:Talwalkar, Presh [Talwalkar, Presh]
Language: eng
Format: epub
Publisher: Presh Talwalkar
Published: 2013-12-09T22:00:00+00:00

Credible Threats

To win a game of chicken, the strategy is to appear tough, and very importantly, get the other person to believe that. The ability to get other people to believe you is useful in many situations, and this is a natural transition into the game theory concept of credibility.

Threats can fall into two categories: credible and non-credible. A threat is credible if it will likely be followed through. For instance, when a utility company threatens to disconnect your service for non-payment, it is credible since it can and often does follow through.

A threat is non-credible if the opposite holds: you cannot believe it since it is unlikely it will be followed through. These threats are made to encourage behavior, but a savvy person would not believe them. For instance, a defense attorney may threaten that her client will drag a matter out in court—no matter what the evidence is—to encourage the prosecution to consider out of court settlements. But the threat is not credible because if strong evidence comes out, the defense will most likely bargain.

There are two main results: (1) you should only consider credible threats in your decision-making, and (2) threats are credible only if you would follow through on them.

On a practical matter, you can achieve your goals by making your threats appear credible, even if they are non-credible. Here are five methods to make your threats more believable.

Method 1: Have An Alternative

Nothing scares a seller like when you threaten to run a competitor. If you want to negotiate a lower cable rate, internet connection, or better deal on a car, tell the seller your other offer, convince them you really want to stay but are willing to switch (even if you are not), and see how often they cave in.

I'm sure most of you have been in this position and succeeded at some point so I will not belabor it. The truth is, if you have a true alternative, you do not need game theory to help you. I will continue with methods that give you the illusion of leverage even when you do not have it.

Method 2: Use A “Risky Threat”

One summer I was a counselor of a month-long camp for high-school students at Stanford University. Being in charge of thirty high-school students is not easy because we counselors had few real punishments we could dispense.

For mild misbehavior, we would often threaten to call an unruly camper's parents. Most campers fell in line because they were scared. But in reality, this was a non-credible threat. A call to parents would not only anger the parents, who were spending good money for this camp, but it would raise questions to our boss, who might wonder if we were bad counselors.

There were of course some kids who still misbehaved repeatedly—perhaps they figured out our hollow threat. We devised a better solution for them: we threatened that we'd tell college admissions officers about their poor character, which would ruin their chances of getting in. Now, I did

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