Is game theory real? Ask Bill Belichick's Patriots.
(FORTUNE Magazine) – IF GAME THEORY SOUNDS TOO RAREFIED TO INTEREST you, consider a small story about one of the discipline's geniuses, Thomas Schelling, who just received the Nobel Prize in economics for his work in the field. When a bunch of undergraduates (including yours truly) showed up on the first day of his course at Harvard some years ago, Schelling started describing how demanding the class would be. Students began drifting from the room. He went into deeper detail about the extreme rigor and hard work he required. More students bolted. Finally, with only a few of us left sweating and terrified in our seats, he told us to relax: The tough talk was a ruse to get the class down to manageable size and make sure it included only the most dedicated students.
As it turned out, he did make us work hard--and we all came through it thinking the subject was vitally important and the professor was terrific.
I was glad to see the prize go to Schelling, 84 (and to Israeli mathematician Robert Aumann, 75), because game theory is way more valuable than most people realize. It's the basis of the most fascinating and important social science research now being conducted, with the clearest real-world applications. But the discipline has a big PR problem: "Game" and "theory" are major turnoff words to the hard-headed, practical people who could benefit from it most. So let's call it something else: deep strategy. For that's what it is. And the principles Schelling worked on in helping manage America's successful 45-year nuclear standoff with the Soviets are shaping some of today's most important events.
For example, Schelling stressed the "rationality of irrationality." Translation: You can vastly strengthen your position in an interdependent situation by persuading the other side that you're slightly nuts. If a hitchhiker pulls a gun on you, you step on the gas, head for a telephone pole, and tell him to throw the gun away or you both die. In today's world, a rational Kim Jong Il would never threaten to use nuclear weapons against the U.S. or its allies, since we have 10,000 nukes and could quickly turn North Korea into a smoking hole. But he does threaten it, and since he's apparently loony, we treat him extremely carefully.
In the business realm, the airline mechanics' union threatened to drive United and later Northwest into the telephone pole (a favorite union bumper sticker: FULL PAY TO THE LAST DAY). Trouble is, the union doesn't have a reputation for being crazy enough--it has accepted pay cuts in the past--so the strategy hasn't worked. The airlines have faced the union down. By contrast, I've always thought Ted Turner benefits from the perception that he's off his rocker. Lots of people think he's nuts, but he's just nuts enough to have made himself a billionaire.
The Nobel committee cited Schelling for showing, among other things, "that a party can strengthen its position by overtly worsening its own options." Famous example: The Russians' fictional doomsday machine in Dr. Strangelove, a movie on which director Stanley Kubrick consulted with Schelling. The machine was a series of nuclear bombs that would go off automatically, destroying the world, if Russia were attacked. The key concept is that once it was turned on, the machine was out of the Russians' control.
That's a familiar idea in business. Every negotiator loves to say, "Hey, that issue is out of my hands!" Canny labor leaders will sometimes arrange a vote of the membership to hem in the positions they can take in negotiations. Just as irrationality can be rational, weakness can be strength.
Besides game theory's world-historical and business significance, it's worth noting, especially at this time of year, that it actually does apply to games. A scholarly paper by Berkeley economist David Romer showed that NFL coaches punt too often on fourth down. Patriots coach Bill Belichick, the league's most successful coach in recent years, read the paper and later stunned fans by running on fourth and one--successfully--in the AFC championship game two years ago. In baseball, a study by an economist and a mathematician examined why American League batters get beaned more often than National Leaguers (short answer: The designated-hitter rule leaves pitchers less afraid of retaliation). As poker has exploded in popularity, some of the new champs have been computer-savvy game theoreticians.
So all hail the Nobel committee for reminding us of the power and pervasiveness of game theo--er, deep strategy. At long last, it's time to get past the name and appreciate the science behind it. As the committee recognized, this stuff works.