Penalty shoot-outs provide tactical lessons in the game of life

BOOK REVIEW: Pat Gibbonsreviews The Art of Strategy - A Game Theorist's Guide to Success in Business and LifeBy Avinash Dixit and Barry Nalebuff; WW Norton Company; £16.99 (€18)

SINCE THE publication of In Search of Excellence by Peters and Waterman in the early 1980s there has been an explosion in business and management books.

Many of the publications offer "rules" or methods with typically amazing claims as to the likelihood of success if you follow "the rules" advanced.

Fortunately, this book is different, despite the claim made in the title. The book provides both insight and a framework for conceptualising decisions which moves the reader beyond being a passive recipient of others' rules to being an active creator of strategic insight. Social psychologist Kurt Lewin's comment that there is nothing as practical as a good theory is most apt in discussing game theory.

The book will be useful to anyone interested or engaged in interactions where competition and co-operation are required, where negotiations are a feature of life, where auctions and bidding are market mechanisms and where incentive systems need to be designed.

Moreover, the general reader will also be informed by this book in its clear exposition of a theory that informs policy-making in the public and private spheres.

Game theory addresses issues related to interactions among interdependent actors and seeks to explain how these actors will behave, in particular contexts.

The main body of theory originated in the post-war period and much of the theory was developed to inform foreign and defence policies during the Cold War. The theory is grounded in elegant mathematical models and much of the literature is extremely arcane.

The authors of this excellent book have successfully translated the major arguments of game theory from the Greek alphabet favoured in mathematics to normal English.

The book is organised into three major sections. The first section addresses the prisoner's dilemma and the concept of the Nash equilibrium developed by the eponymous mathematician profiled in the commercially successful bio-pic A Beautiful Mind.

The second section moves on to discuss choice and credible commitments. The final section deals with a series of discrete topics such as voting, incentives and bargaining. The genius of this book is that the topics mentioned above, among others, are introduced in the first chapter with 10 vignettes outlining specific problems from normal life which game theory addresses.

Such vignettes range from the America's Cup, Charles de Gaulle's noted intransigence in various contexts, and Truman Capote's description of the real prisoners' dilemmas depicted in his book In Cold Blood. A feature throughout the book is the authors' ability to bring game theory insights to life through examples, experiments, questions and illustrations drawn from such sources as the writings of TS Eliot, the Bible, TV programmes (ABC's Primetime) and cinema ( The Maltese Falcon, LA Confidential).

There are a number of specific insights from game theory which are particularly well-developed in the book. The fundamental issue which game theory addresses is that the outcomes associated with one's actions are contingent on the actions of others.

We can obviously see this in competitive situations and this is particularly well illustrated in soccer penalty shoot-outs. The authors use the shoot-out situation to illustrate the value of so-called mixed strategies, that is a series of random moves, as any pattern, let's say in penalty shooting (or attempted saving), will be exploited by the opponent.

The discussion of strategic moves, commitments, threats and promises in section two of the book reflects central concerns among game theorists. The notion of commitment is particularly important and reflects an unconditional strategic move. Commitment reduces the range of choices available to an actor, by the actor's own choice. Marriage provides an example through the public declaration "to foresake" all others. Threats and promises are conditional moves, where a player will establish a response rule, if another actor behaves in a certain way.

An example occurs where a company promises to match the price offered by a competitor if that price is lower than the offering. What is important with these moves is the credibility of the commitment, promise or threat. Thus, individuals, firms, and governments invest in reputation-building activities to enhance credibility and to send credible signals of their intentions to act. I am writing this review in Singapore, a nation that has established a credible reputation in its commitment to keeping drugs out of the country with a reliance on stringent sanctions, including the death penalty, rigidly and consistently enforced.

While the book is well-written and clearly illustrated, it is not a bedside read. The depth of conceptual development and the illustrations require a high degree of concentration. Moreover, to derive maximum benefit from the book I would encourage the reader to work through the examples developed in the book.

The authors provide what they call "trips to the gym", which are effectively problems that the reader can solve by applying the conceptual apparatus developed in the chapters. Naturally, this requires commitment from the reader, but such commitment will be rewarded with the promise of much deeper understanding.

• Pat Gibbons is Jefferson Smurfit professor of corporate planning at the UCD Smurfit graduate business school