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2022 Strategic Forecasting and Risk Analysis - Lecture 6

The document discusses strategic moves in game theory, including: 1) Strategic moves purposefully limit one's freedom of action to alter others' beliefs and responses. 2) Credible strategic moves require a commitment to support the move and make reversing it too costly. 3) Unconditional moves seize initiative by acting first. Threats and promises also provide strategic advantage through commitment to response rules before others move.

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0% found this document useful (0 votes)
40 views74 pages

2022 Strategic Forecasting and Risk Analysis - Lecture 6

The document discusses strategic moves in game theory, including: 1) Strategic moves purposefully limit one's freedom of action to alter others' beliefs and responses. 2) Credible strategic moves require a commitment to support the move and make reversing it too costly. 3) Unconditional moves seize initiative by acting first. Threats and promises also provide strategic advantage through commitment to response rules before others move.

Uploaded by

Vengesai
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Strategic Forecasting and Risk Analysis

Dr. V. MAGADZIRE
Ph.D. in Economics, United Kingdom
Ph.D. in Public Policy, South Korea
Master of Public Policy, Japan
Master of International Business, The Netherlands
Master of Science in Finance and Investment, NUST Zim
B.Com (Hons) in Banking, NUST Zimbabwe
Strategic Intelligence and Game Theory
Objectives
Strategic moves

A strategic move:

is designed to alter the beliefs


and actions of others in a
direction favorable to yourself
Strategic moves

The distinguishing feature is that


the move purposefully limits your
freedom of action
Strategic moves

This can be done in an unconditional


way:

e.g.

apresidential candidate pledges he


will not raise taxes, period.
Strategic moves
Or, freedom can be limited because the
strategic move specifies a rule for how to
respond under different circumstances

e.g.

many states have mandatory sentencing laws


for crimes with handguns; these statutes
purposefully limit judicial discretion
Strategic moves

You might have thought that leaving


options open is always preferable

But in the realm of strategic intelligence


games that is no longer true

Your lack of freedom has strategic value


Strategic moves

Itchanges other players’ expectations


about your future responses, and you
can turn this to your advantage

Othersknow that when you have the


freedom to act, you also have the
freedom to capitulate
Strategic moves
Example: Unconditional moves

Picture a rivalry between the United


States and Japan to develop high-
definition TV

Although the United States has a


technological edge, it also has more
limited resources owing to
accumulated budget deficits
Strategic moves
Example: Unconditional moves (cont’)

 The Japanese play off of this


handicap and once again beat the
United States

But a strategic move that at first


glance appears to handicap the United
States further can change all that
Strategic moves
Example: Unconditional moves (cont’)

In the absence of any unconditional moves,


Washington and Tokyo:

i. simultaneously choose their strategies

ii. Each country decides between a low or high


level of research and development effort; a
high-effort level shortens development time,
incurring much greater costs
Strategic moves
Example: Unconditional moves (cont’)

We depict this as a game, and set


up the payoff table

Each side has two strategies, so


there are four possible outcomes
Strategic moves
Example: Unconditional moves (cont’)

We suppose both sides regard a high-


effort race as the worst scenario —

the Japanese because the United States is more


likely to win an all-out race, and the United
States because of the greater cost

Call this payoff 1 for each side


Strategic moves
Example: Unconditional moves (cont’)

Each side’s second worst outcome


(payoff 2) is pursuing low effort
while the other goes all out:

this is spending money with little


chance of success
Strategic moves
Strategic moves
Example: Unconditional moves (cont’)

The Japanese like best (labeled as


payoff 4) the situation in which they
pursue high effort and the United
States follows low effort;

theirchances of winning are high, and


resource costs matter less for them
Strategic moves

Example: Unconditional moves


(cont’)

For the United States, the best


situation is when both sides make
low effort;

they are likely to win at low cost


Strategic moves
Example: Unconditional moves
(cont’)

Low effort is the dominant


strategy for the United States
The problem for the United States is
that the Japanese can anticipate this
Strategic moves
Example: Unconditional moves (cont’)

The Japanese best response is to follow high


effort

The equilibrium of the game is the top right cell,


where the United States gets its second worst
payoff

To improve its position calls for a strategic move


Strategic moves
Example: Unconditional moves (cont’)

Suppose the United States preempts

◦ It announces its unconditional effort level before the


Japanese reach their decision

◦ This turns the simultaneous-move game into a sequential-


move game, one in which the United States goes first

◦ The table turns into a tree


Strategic moves
Strategic moves

Thisgame is solved by looking


forward and reasoning back

If the United States pursues low


effort, the Japanese respond with
high, and the U.S. payoff is 2
Strategic moves

If the United States pursues high


effort, the Japanese respond with low,
and the U.S. payoff is 3

Therefore the United States should


announce high, and expect the
Japanese to respond low
Strategic moves

This is the equilibrium of the


sequential move game

Itgives the United States a payoff


of 3, more than the 2 it got in the
simultaneous-move game
Strategic moves

The strategic move that brings the


United States this advantage is a
unilateral and unconditional declaration
of its choice

Thechoice is not what the United States


would have made in simultaneous play
Strategic moves

This is where the strategic


thinking enters

The United States has nothing to gain


by declaring the choice of low effort;
the Japanese expect that anyway in the
absence of any declaration
Strategic moves

To behave strategically, you must


commit not to follow your equilibrium
strategy of the simultaneous-move game

The strategic move changes Japanese


expectations, and therefore their
response
Strategic moves

Once they believe that the United States


is committed to high effort, the Japanese
will choose low effort

Of course, after the Japanese choose their


path, the United States would do better to
change its mind and switch to low effort,
too
Strategic moves

This raises several questions:

i. Why should the Japanese believe the U.S.


declaration?

ii. Would they not anticipate a change of mind?

iii. And if they anticipate such a reversal, would


they not choose high effort?
Strategic moves
Inother words, the credibility of the
U.S. unconditional first move is suspect

Without credibility, the move has no


effect

Most strategic moves must confront this


problem of credibility
Strategic moves

To give a strategic move


credibility, you have to take some
other supporting action that
makes reversing the move too
costly or even impossible
Strategic moves

Credibility
requires a
commitment to the strategic move
Strategic moves
Strategic moves thus contain two
elements:

i. the planned course of action and

ii. the commitment that makes this


course credible
Threats and promises
Threats and promises

An unconditional move gives a


strategic advantage to a player
able to seize the initiative and
move first
Threats and promises

Even when you don’t actually


move first, you can achieve a
similar strategic advantage
through a commitment to a
response rule
Threats and promises

The response rule prescribes your action


as a response to the others’ moves

Although you act as a follower, the


commitment to the response rule must
be in place before others make their
moves
Threats and promises

Response rules fall under two


broad categories:

i. threats and

ii. promises
Threats and promises

A threatis a response rule that


punishes others who fail to
cooperate with you
Threats and promises

There are compellent threats:

 e.g.

when a terrorist hijacks a plane and


establishes a response rule that the
passengers will be killed if his demands
are rejected
Threats and promises

There are also deterrent threats:

 e.g.

when the United States threatens that it


will respond with nuclear weapons if the
Soviet Union attacks any NATO country
Threats and promises

The second category of response


rules is promises

Thisis an offer to reward


someone who cooperates with
you
Threats and promises
We summarize the options for strategic moves as
follows:

 Anunconditional move is a response rule in which


you move first and your action is fixed

 Threats and promises arise when you move second

 They are conditional moves because the response


dictated by the rule depends on what the other side
does
Threats and promises
Threats and promises

A strategicmove is always a
preemptive action

The response rule must be in


place before the other side moves
Threats and promises

That means that whatever strategic


move is made, the game should be
analyzed as one with sequential
moves

When you are intransigent, others


respond to your unconditional action
Threats and promises

With threats and promises -:


you first lay down a response rule,
then others move and you respond
according to your response rule
Threats and promises

As a result -:

commitment to an action or
response rule transforms an
otherwise simultaneous-move game
into a sequential-move game
Threats and promises

Although the payoffs remain


unchanged -:

a game played with simultaneous moves in


one case and sequential moves in another can
have dramatically different outcomes
Threats and promises

Example -:

threats and promises arising in a


confrontation between the United
States and the Soviets
Threats and promises

Example cont’ -:

For over forty years, the North


Atlantic Treaty Organization
(NATO) sought a credible
deterrence to any Soviet attempt to
invade Western Europe
Threats and promises
Example cont’-:

A conventional defense by NATO


forces was not likely to succeed.

A primary component of the NATO


deterrence was based on the U.S.
nuclear forces
Threats and promises

Example cont’ -:

Yet,a nuclear response would be


devastating for the whole world.

How could this work?


Threats and promises
Example cont’ -:
Let us show the game in a tree

The Soviets have the first move

If they do not attack, we have the


status quo; score this 0 for each side
Threats and promises
Example cont’ -:

Ifthey attack and NATO attempts a


conventional defense, suppose the
Soviets have the payoff 1 and the
United States has -1

A nuclear response gives -100 to each


side
Threats and promises
Example cont’ -:

In this game,

the Soviets look ahead and forecast


that their aggression will not bring
forth a nuclear response
Threats and promises
Example cont’ -:

Itis not in the U.S. interests after


the fact:

Thus attacking will give them the


payoff 1; not attacking, 0. Therefore
they will attack.
Threats and promises - Tree and Payoffs in
Sequential-Move Game
Threats and promises
Example cont’ -:
If you think this an unlikely scenario, the
European members of NATO thought it
all too likely that the United States would
desert them in their time of need in just
this way

They wanted the United States to commit


credibly to a nuclear response
Threats and promises
Example cont’ -:

Let us leave aside the issue of


credibility for now, and examine
the mechanics of how such a
threat could work
Threats and promises
Example cont’ –:
Now the United States has the first
move, namely the response rule it
puts in place. The pertinent rule is the
threat:

◦ “If the Soviets attack Western Europe,


our response will be nuclear.”
Threats and promises
Example cont’ -:

Ifthe United States does not make the


threat, the rest of the game unfolds as
before

With the threat in place, the choice of a


conventional defense no longer exists
Payoffs in Sequential-Move Game with Threat in
Place
Threats and promises

Once the U.S. threat is in place,


the Soviets look ahead and
recognize that aggression will
meet a nuclear response and
result in a Soviet payoff of -100
Threats and promises
Example cont’ -:
They prefer the status quo, and so do not
invade

Now the United States in its first move looks


ahead to all this and sees that its payoff is 0
with the threat and 1 without

Therefore U.S. interests dictate making the


threat
Threats and promises
Example cont’ -:

Once again, observe that the U.S.


response rule requires doing
something that is not the best
response after the fact
Threats and promises
Example cont’ -:
Therein lies the strategic purpose: by
credibly altering the Soviets’
perception of the U.S. response after
the fact, the United States can change
“the fact”—namely, the Soviet
decision whether or not to invade
Western Europe
Threats and promises

The rule must be in place before


the other party has already taken
the action you want to influence
Threats and promises

After the fact, neither an


unconditional move nor threats
and promises have any relevance
Threats and promises

This first move must be either


observed or inferred by the rival,
or else you cannot use it for
strategic effect
Summary
Summary
Summary

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