You will notice that we did not pick the point on the curve where the flavor was maximized,” Nalebuff says. “The reason was that by backing off the sweetness from there we lost very little in terms of flavor, while saving a good amount in terms of calories.” Honest Tea’s performance suggests that the theory holds water: The slightly sweet beverage is the number one brand in such premium chains as Whole Foods.
The professor brings that same practical approach to the classroom. In his business school classes on negotiation and strategy, he leans heavily on his experiences building Honest Tea into a thriving operation. Meanwhile, he has coauthored three well-regarded books that popularize his approach to problem solving, wherein the ability to achieve good results depends on the ability to recognize marginal gains and probabilistic outcomes. “There are nonbelievers out there who think that game theory is an interesting academic subject that doesn’t have much to contribute to business,” Nalebuff says. “I believe that a game theory perspective has wide applications. A better understanding of game theory can lead to more successful business, politics, and everyday life.”
As suggested by the titles of his books — Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life; Co-opetition: A Revolutionary Mind-set That Combines Competition and Cooperation. The Game Theory Strategy That’s Changing the Game of Business; and Why Not? How to Use Everyday Ingenuity to Solve Problems Big and Small — Barry Nalebuff regards practicality as an absolute requirement for any theory. The most practical ideas are those that serve the greater good by helping individuals observe their environment more keenly. “A key lesson of game theory is to look ahead and anticipate the moves and countermoves of others,” says Nalebuff, while striding through the convention center aisles. “Many of our current struggles in shaping the world come from a failure to anticipate the reaction of others to our strategy.”
Nalebuff stops in front of HappyBaby, a new purveyor of frozen organic baby food. After pronouncing her pears “delicious,” he peppers Shazi Visram, HappyBaby’s founder and CEO, with questions and unsolicited advice. “The challenge with this is that it’s frozen,” Nalebuff says. “Frozen distribution is incredibly challenging, and the hard part for you will be ramping up production.” He gives Visram a contact for a Canadian company that has nailed the manufacture and distribution of frozen foods. The two then moan about the body aches associated with long days at the booth. “We were thinking of holding a yoga class in the aisle,” Visram says. Nalebuff immediately shifts into a one-legged pose, his arms thrust forward. That lasts only a few seconds; then, with a flourish and a smile, he heads down the aisle in search of his ice cream.
Boundaries and Incentives
Barry Nalebuff first visited Yale in the mid-1970s as a prospective student during his senior year of high school. Egged on by friends, he entered the college’s oratory contest, a competition normally confined to Yale undergrads. Never mind that he wasn’t a student there; he hadn’t even prepared a text. He won. Yale offered him admission, but he decided on MIT instead. “I thought I would be a mathematician,” he says. “Then I realized I didn’t quite have it, and the world doesn’t need any more pretty good mathematicians.” He says his curiosity and his facility with numbers drove him to study economics and then game theory, which he pursued at Oxford University as a Rhodes Scholar.
Game theory is the science of interactions. Introduced more than 60 years ago by John von Neumann, the father of modern computer architecture, and economist Oscar Morgenstern, game theory is a mathematical tool used to anticipate possible scenarios and develop appropriate strategies to deal with them. It is based in part on the premise that the decisions made by any players in a game change the nature of the playing field for everyone. For example, a basketball player on a winning streak changes the nature of play for the entire team; the opposition, because it must devote its attention to guarding the star player, can no longer cover the whole court effectively. This in turn gives other members of the star player’s team a better chance of becoming stars themselves. In pure game theory, winning strategies involve learning to understand the mind-set and likely moves of key players, and then anticipating their impact as everyone else reacts. For businesspeople, an effective game theory–based strategy might mean examining all the players in an industry and teasing out how a move in any particular direction will affect everyone else. The British navy pioneered game theory in World War II to help the Allies track German U-boats across the Atlantic. Game theory was later adapted in academic settings to analyze games like poker, football, and chess. (That history was depicted in Sylvia Nasar’s book A Beautiful Mind, about mathematician John Nash, and in the film made from that book.)