Credibility in Game Theory

A framework for developing credibility.

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How do you make strategies credible? We have seen some strategies not hold much weight and as a result, cooperation and agreements are unattainable. For example, I remember seeing action movies where the villain is about to escape and the hero is holding the villain at gunpoint. However, the villain knows that the hero will not shoot him or her (due to the hero’s reputation of doing the right thing) so the threat is not credible and the villain escapes.

According to The Art of Strategy, there are three broad principles to improving the credibility of changing your strategic moves. The first principle is changing the payoffs of the game. Depending on your strategy, a threat can be a warning or a promise can be an assurance. This is attainable through written contracts and establishing a reputation.

Contracts are very effective as parties will agree to pay penalties and/or fines should there be a breach in the contract. For example, a financial institution could hold a vendor accountable and be rewarded if services level agreements are not maintained.

With regards to reputation, you never want to make a strategic move in the game and then back-off otherwise you lose credibility. We’ve seen this occur in past Presidencies which have led to insurmountable damage.  At times, you can be playing with different players at different times for a specified game. By establishing a reputation (a good one), you have developed history that future players will remember which gives you instant credibility.

The second principle is to change the game by limiting your ability to back out of a commitment. This is can be achieved by either cutting of communication or possibly burning bridges. Cutting off communication can appear credible because an action is truly irreversible. An extreme case would be ultimate sacrifice made by heroes in movies. Another example is people being served. Once they have identified who they are, there is no going back and the choice that they made is irreversible.

Burning bridges in business would be like fighting against potential intruders attempting to enter the market. An example is the NFL having a monopoly on the market. Some competitors have tried, but all have failed.

The third principle is using others to help you maintain commitment and ultimately credibility. For example, teams could possibly establish credibility easier than an individual. Health programs like Weightwatchers use this as part of their business model. By bringing like-minded people with the same goals together, commitment, accountability, and motivation is increased.

Another example is the use of mandated agents. Sometimes you may find yourself in a difficult position to negotiate whether it be a family member or some other social link/bond. As a result, it may be more advantageous to hire an impersonal mediator. We see this with professional athletes who hire agents to handle contract negotiations with professional teams.

Next time we will discuss ways to manipulate information during strategic decisions.

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