It is therefore worth considering this concept of 'irrationality' and how this affects our conversation on anticipation and reinvention. You learned about the dollar auction game developed by Martin Shubik before starting this module. As odd as this auction might seem to you, it can enlighten us on this issue of irrationality and people you deem crazy. Can you remember what this dollar auction game is about? A. An auction in which everyone wins, B. An auction in which everyone loses, C. An auction in which you owe what you bid, or D. none of the above ? I think that you will agree with me that the answer is C. Though if you are tempted to add B, I really wouldn't blame you. Indeed, remember the setting. I look to auction off a hundred-dollar bill. You can bid whatever you would like, and initially, you could potentially make a lot of money. Bidding one dollar for instance, and winning the auction, could represent a ninety-nine-dollar prize. But here’s the twist, whether you win or lose, you owe me the amount of your highest bid. Here’s the question: what do you think will happen in this game? Pause this video and think about it. I think that you will have noticed that once you’ve started to bid, and once you find yourself in this vicious cycle, it’s impossible to get out of it. This replicates quite well what happens when two firms compete on R&D spending without knowing whether their project will succeed, or, in geopolitics, in the case of escalation. In practice, here is what is likely to happen. Facing someone who does not want to lose, both of you will keep on overbidding and overbidding, perhaps until you’ve reached the hundred dollars. Then there is nothing to win anymore, but so much to lose. Imagine you back off at ninety-nine dollars. You would still owe that sum, given the rules of the game. And you would actually minimise your losses by bidding a hundred and one dollars, since you would have a shot at winning the hundred-dollar bill and thus only lose one dollar instead of ninety-nine dollars. On the other side, your rival will act in the same way obviously. This can last a very long time, well beyond the hundred-dollar mark as some lab experiments have shown. So here’s another question: what would be the best strategy? Pause this video and think about it. I think that if you’re still with me, you’ll agree in fact that the best strategy lies in not playing. And I mean ever. Again, once you find yourself in this vicious cycle, it’s impossible to get out of it. So never getting into it in the first place might be the best thing you can do. But let’s ask a different question. Imagine some people do participate in this auction. What psychological traits would you associated with the person who actually walks away with the hundred dollars bill? Again, pause this video for a moment to think about this question. This is somewhat of a harder question, isn’t it? After viewing this video, you’ll get a chance to look at a few short case that is replicating this game quite nicely. But broadly speaking, it seems that, from a psychological point of view, the person willing to sustain the most losses, the one willing to take significant risks, the one, in short, that will most likely be called irrational or crazy by others, is likely to ultimately walk away with the prize. Perhaps because that person has the ability to impress all others. What lessons should we draw from this? Back to Thomas Schelling. The author argues: 'Even among the emotionally unbalanced, among the certified irrationals, there is often observed an intuitive appreciation of the principles of strategy, or at least of particular applications of them. I am told that inmates of mental hospitals often seem to cultivate, deliberately or instinctively, value systems that make them less susceptible to disciplinary threats and more capable of exercising coercion themselves.' Schelling goes on to add: 'It may not be an exaggeration to say that our sophistication sometimes suppresses sound intuitions, and one of the effects of an explicit theory may be to restore some intuitive notions that were only superficially irrational. It may be perfectly rational to wish oneself altogether, not altogether rational or if that language is philosophically objectionable, to wish for the power to suspend certain rational capabilities in particular situations.' It seems, therefore, that the most significant lesson of the dollar auction and this debate over irrationality is that one should be careful before labelling a rival or a mere counterpart as irrational or crazy. That irrational counterpart may have far more leverage than you think. That counterpart may have a far better grasp on the basic principles of strategic thinking and may very well be, therefore, a few steps ahead, nurturing a strategic edge others did not even realise that person had. Ultimately, it seems that many societies value predictability on the part of an individual, and frown upon unpredictable and erratic behaviour. In fact, we are trained to be predictable. We are appreciated by colleagues because we are to some extent predictable. And we are loved by close ones because we are predictable. But is there no strategic harm to being predictable all the time? More provocatively, should you emulate crazy people and be unpredictable yourself? I hope this conversation will get you thinking about this issue at a very least. Let’s consider a question before concluding this talk: Why should you account for the human factor in your effort to reinvent for the future? A. Because it can help you identify the situations that you should avoid, B. Because it can help you understand better who has leverage, C. Because it can help you think about the merits of predictability, or D. none of the above? If you’re still with me, I think that you’ll agree that the answers are A, B and C. Indeed, first, when considering people, you should understand the outcomes that are bound to be unfavourable to you. Indeed, labelling someone as irrational is quite easy to do. But what might prove to be harder, yet far more crucial, is identifying, before the fact, the situations in which you should not participate, in particular because other stakeholders motives are incompatible with your aspirations. So the challenge lies, ultimately, in identifying those situations that you will never be able to get out of advantageously, and in avoiding them all together. Second, when considering people, you should understand why the ones you consider irrational may have far more leverage than you think. Labelling someone as irrational could lead you to miss the point: that person may have a far better grasp of strategic principles and might be far ahead of you in terms of strategic thinking. The diligent analyst may need to drop the irrational notion all together and focus on the motivations of other people, as hard as these might seem to grasp on the surface. Last but not least, you should perhaps question the need to be predictable all the time. You might be able to find additional sources of leverage if you do. Let’s conclude now and think about the implications this has for the final steps of our conversation.
