Book Review - Prisoner's Dilemma

What links the H-bomb, playing chicken and the Cuban missile crisis to game theory?

The answer, according to William Poundstone, is the famous game called the prisoner's dilemma (see here for a fun example). His 1992 book Prisoner's Dilemma is not recent (I was a toddler back then) but is still both fascinating and relevant.

Poundstone's approach is to carefully weave together a biography of John von Neumann and a potted history of the nuclear arms race with examples of fun games. The end result is an utterly gripping read (between you and me I read it in lectures) that never fails to surprise (whether you be an economist or normal).

So as not to ruin the book I'll only share one example of H-bomb game theory...

First, read this fun example of a brilliant game to play with your friends.

Now, the 'Dollar Game' is special because it induces buyers regret. Those who bid inevitably wish they hadn't! There is a rapid escalation. Before we know it, both bidders are wishing they were back where they started. But they always have an incentive to go one higher. They do not want to be left in second place. This is not dissimilar to the nuclear arms race.

The analogy starts with America building the A-bomb at the end of WWII. Understandably, Russia could not contemplate being out gunned so they got one. So the USA understandably got more A-bombs. So did the USSR. So America built the H-bomb. So Russia did too. And so on. The starting position led to escalation and both states ended up in a worse position than at the start when neither had any nuclear bombs: They had spent a lot of money on no tactical advantage. If they had coordinated they could have stopped at some point (i.e. just having one A-bomb each). Sadly for both nations this was never likely to happen.

In fact, the more Poundstone delves into the cold war the more analogies crop up. Coincidently (or not) the people who originally created game theory, such as John von Neumann, also created the bomb.

I highly recommend you read Prisoner's Dilemma so that (if nothing else) you can start to see real life conundrums through game theory spectacles, and what spectacles!

Genre: Economics/Behavioural Economics
Accessibility: 10/10
Accuracy: 9/10
Readability: 9/10
Usefulness: 7/10
Verdict: Very, very interesting!

Book Review - Priceless

I have a huge amount of affection for Priceless by William Poundstone because it was the book that first introduced me to behavioural economics. It prompted me to study all things behavioural at university, and I haven't looked back. For this reason I may be a little biased in favour of Priceless but the bias is, at root, caused by the book being brilliant.

William Poundstone expertly explores how shops constantly use behavioural economics to encourage you to buy their goods, while simultaneously telling the story of how behavioural economics came to be. It is an utterly gripping read, written by an accomplished journalist who knows how to keep you hooked. It will have you doing little experiments on your friends all the time (as my housemates at the time can testify).

Priceless lifts the lid on the art of pricing, advertising and marketing. You will finish it a wiser consumer, potentially less like a hapless wave; driven and tossed by the winds of capitalism.

My favourite example that he uses is of the free 72 ounce steak. Some American burger joints are famous for offering 72 ounce  steaks for $72 unless you can finish it in one sitting, in which case there is no charge. People travel miles to take the challenge, and when they do they are placed on a high table, with all their friends looking on from the rest of the restaurant. Poundstone reveals that the way these burger joints make their money is not from people failing the challenge (which is most of the time), but from their friends paying over the odds for a normal steak. Their friends' perception of value is anchored on the $72 steak, and so the $19.99 steak seems cheap, even though it might only be $9.99 elsewhere. The moral of the story is don't buy a normal steak at one of these places!

My one gripe with Priceless is that it focuses on the psychologists at the cost of behavioural economists. The two groups do not always agree and in some cases the story is rather one-sided. This, however, is a minor complaint; Priceless has so many outstanding features that make it just fantastic.

It is A Very Good Read. I can't remember what the price was, but I know how much it's worth; quite simply...

Priceless by William Poundstone
Genre: Psychology/Behavioural Economics
Accessibility: 10/10
Accuracy: 7/10
Readability: 10/10
Usefulness: 8/10
Verdict: A Very Good Read