As anyone who’s ever bought a new car knows, Pat will almost certainly ask you, “What will it take to put you in this car today?” Now you’re cornered. If you name a really low price, Pat, who has been playing up to you, looks hurt or loses interest, or maybe even becomes just a little rude. Control of the discussion is now fully out of your hands. You feel bad about the lowball offer, you want to establish your good faith, and so you come back with a number close to what you’re actually prepared to pay because you want to keep the conversation going. So Pat has gotten you to put a credible price on the table. Now, after praising the offer, Pat announces that this is a price that can be taken to the sales manager for approval. This is when the price gets jacked up a little bit more to close the deal. Rather than worrying about what the sales manager will say as you sit at Pat’s desk, sipping dishwater-thin coffee from a paper cup, ask yourself, Is it possible that Pat does not know the vehicle’s price?! Hard to believe, since that’s what Pat does all day—sell cars.
You have now given Pat almost all the important information that was in your hands. Meanwhile, you have learned very little about the true state of the market. You may believe that Pat is working on your behalf with the sales manager, telling the manager what a good customer you are and how nice your family is. My guess is that they talk about last night’s football game or how lousy that coffee is, and then Pat emerges with a price.
After some haggling over minor details, hands are shaken and a deal is struck. You feel efficacious. You got a “good” price that you will boast about to your friends. Pat assures you that this is so—and maybe it is, but then the nature of any sale is that the buyer and the seller are both happy with the price; otherwise there’s no deal. You really do not know that you’ve gotten the best price for the car, just as the salesperson does not know that you paid the most you were prepared to pay. But Pat controlled the agenda, revealed little, and worked your price up. That is one more point for the dealer and maybe, just maybe, one for you too. The winner: the dealer by at least 3 or 4 to 1.
Now, the Internet can work much better. There is lots of useful information to be had, including information that car dealers don’t want buyers to know. It’s a great source for finding out a car’s invoice price, for example, and Internet car purchase services generally guarantee that you’ll be contacted by two or three dealers who at least know that you’ve already done some online comparison shopping. Still, making a deal requires going to a dealership. Once you are in the dealership, everything that happens in the first way of buying cars is now going to happen again, except that Pat already knows you’re interested at the price quoted online. Maybe Pat says the exact car you asked about isn’t available. Sure, it could be special-ordered, but that will take a long time. Maybe Pat offers you a seemingly good deal on a different car and the information gained on the Internet fades in importance. How about a similar car with a few extras—maybe a sunroof, a super-duper sound system, special trim, whatever—that you really don’t want? At least that car is on the dealer’s lot, if only for just a little bit more money. Or maybe you close the deal on the car you asked about at the price quoted online. Well, you’re probably closer to the lowest price the dealer will take, but in all likelihood you are not there. After all, they don’t quote a price to you that they expect you to bid up from; they anticipate you’re going to look for ways to cut their price. It must have some give left in it.
So, how else can you buy a car? Here’s what I recommend so that information flows to you and very little information flows the other way; so that beliefs change in your favor and not in favor of the seller; so that prospective sellers are compelled by self-interest to reveal their lowest price (their reservation price, as economists call it) and you are not.
It is always advantageous to control the agenda in a negotiation. In the car-buying context, that means constructing the conversation so that the seller puts her best price on the table knowing that it will not be accepted right now no matter how good it is. To achieve this, the seller needs to be told the game you are playing, including that you’re serious about buying a car. The game goes like this:
Do your homework and decide exactly what car you want to buy. You may go to dealerships for this purpose—I do not, it’s too easy to get sucked in—or you may search online to find the car that best fits your needs. Decide what you value. Is it safety over performance? Style over comfort? Is the color important enough that you’ll pay a premium for one rather than another? Know what options you want and how the options are bundled (sports package, safety package, sound system, etc.). When you know what car you want, including the options, the color, the model, everything, then and only then let your fingers do the walking. Find every dealer that sells the car brand you want within a radius of maybe twenty to fifty miles of your home. For most of us, urban dwellers that we are, that will be a goodly number of dealerships.
Telephone each dealership in the radius you picked. Don’t worry about having to bring the car to a distant dealer for servicing. The manufacturer provides the warranty, not the dealer. Ask to be connected to a salesperson and tell the person precisely what you are doing. Here is my typical spiel: “Hello, my name is Bruce Bueno de Mesquita. I plan to buy the following car [list the exact model and features] today at five P.M. I am calling all of the dealerships within a fifty-mile radius of my home and I am telling each of them what I am telling you. I will come in and buy the car today at five P.M. from the dealer who gives me the lowest price. I need to have the all-in price, including taxes, dealer prep [I ask them not to prep the car and not charge me for it, since dealer prep is little more than giving you a washed car with plastic covers and paper floormats removed, usually for hundreds of dollars], everything, because I will make out the check to your dealership before I come and will not have another check with me.”
If you are making your first call, be sure to tell the salesperson that you will tell the next dealer the price you’ve been quoted. After the first call, make sure the future salespeople know that you will be repeating whatever is the lowest price offered to you so far. That way, future dealers know what price they must beat, and the dealer you are currently talking to knows that if he wants to have a shot at selling you a car, he had better quote his lowest price. Pat’s hands are really tied. Trying to eke out a higher price just means a worse chance of selling you a car. That advantage hardly ever arises when you go to a dealer and give Pat complete control. Instead, you have set up an auction in which everyone knows that they have one chance to make the best bid.
Dealers don’t like getting these phone calls. Their typical first response is, “Sir, you cannot buy a car over the phone.” My reply: “Well, I have purchased many cars this way, so maybe I can’t buy a car from you over the phone, but I know I can from others. So if you do not want to sell a car to me, that is fine.” That is the end of the conversation with a few dealers, but not many. The common follow-up is a line salespeople like to use on the showroom floor when you tell them you are shopping around. “Sir, if I quote a price to you, the next dealer will quote fifty dollars less and you’ll buy it from him.” Pat has reverted to the standard approach and is now trying to regain control by making me feel I should be willing to pay an extra $50, as if I owe at least that to good old Pat. My response: “That’s right. I’ll buy it from the other dealer. So, Pat, if you can quote me that fifty dollars less, this is your opportunity to do so.” Then they often say, “Believe me, come in, we have the best prices in town.” The reply, “Good, then you should be happy to quote the price to me now because you are confident it is the best price. The only reason not to tell me the price on the phone is because you think it will be beaten.” If the conversation has continued—and it does with a substantial portion of dealerships—Pat will quote a price.
I arrive at the lowest-priced dealer, check in hand, just before 5:00 P.M. to close the deal. If there is any change in the terms I leave immediately and go to the second-best offer, and s
o forth. I have only once had to pay the second-best price quoted to me.
I have found that the quoted prices vary tremendously from dealer to dealer, literally by thousands of dollars. I have personally purchased Toyotas, Hondas, and a Volkswagen this way. Some of my students at NYU have taken up this method and bought cars this way too. It’s a nice little payback for their huge tuition bill. They and I have always beaten the price quoted on the Internet with this method. I even purchased a car for my daughter this way when I was three thousand miles from the dealership (she was going in at 5:00 P.M.). The price was so good that it was $1,200 less than the same dealership quoted to me for the same car on the Internet. How do I know it was the same car—I mean really the same car? The price was so good that I asked the salesperson for the VIN (that is, the vehicle identification number), and he gave it to me.
Why does this method work? Game theory is about strategizing in your dealings with other people. Part of strategizing involves realizing that the other person is doing the same. Pat, the salesperson, is thinking about what to say to get a better price from you. You have to think through different ways to respond to Pat’s arguments. The central concern is to anticipate how Pat is likely to reply to you if you say a really high price, a really low price, a moderate price, or, as I recommend, no price at all. Let Pat put the price on the table knowing that lots of other dealers will be given the same opportunity and that you have no intention of keeping Pat’s offer a secret. When Pat is asked for the dealership’s best price, Pat knows that this is the one and only chance they will have to sell you a car.
Salespeople want you to feel good about them. They want you to feel you are letting them down if you hold out for that last fifty dollars or if you question their sincerity. They believe this will weaken your resolve. Please remember: These are the people who invented “dealer prep”! They just want the best price they can get. They have no plans to be your friend.
The telephone approach solves all of these problems. On the telephone, body language is eliminated from the equation and you, not the seller, are in control of the conversation.2 You have set the sequence of moves and defined the game. They know that you will speak to enough dealers that anyone who is on the cusp of a manufacturer’s incentive, for instance, will give you a really good price. They reveal information to you however they reply. The fact that some of them leave the conversation early is a good thing—it saves you time. You have not lost an opportunity. They know their market; that is part of their business. You have given them an incentive to be truthful. They are better off for it, and most assuredly so are you.
When you buy a car this way, that day at 5:00 P.M. you make a deal that is as close to the seller’s minimum price as you can ever hope to get. You are in charge of the negotiation and entitled to feel really good about the deal you struck.
You may be surprised to learn that buying cars and negotiating international crises are not all that different. In fact, I’ll show you how we go from buying a car to negotiating the North Korean nuclear threat. But before we do that, it’s time to dissect game theory a bit to reveal the principles that allow us to anticipate and shape the future.
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GAME THEORY 101
WHEN PEOPLE TALK about science, subjects like chemistry and physics leap to mind. Political science certainly does not. But science is a method, not a subject. It is a method that relies on logical arguments and experimental evidence to figure out how the world of things—and of people—works. The scientific method certainly applies to politics just as it does to physics. Still, physics and politics are quite obviously entirely different subjects. One of the ways they differ is crucial for understanding everything that is to come. You see, the world of physics is pretty much about how particles interact. Now, the central feature of particle interactions is that photons, electrons, neutrons, or their constituent quarks never anticipate crashing into one another. Consequently, there is no strategizing behind the collision of particles.
Studying people is ever so much more complicated than studying inanimate particles. Just think how different interactions are between quarks and Quakers, electrons and electors, protons and protesters. People, and in fact just about every living thing, seem to have a survival instinct. Genes act as if they want to get passed on, bacteria find hosts, cockroaches flee my shoe, and ordinary people look out for what they think is good for them and try to avoid what they think is bad for them. That includes cooperating with friends and fighting with foes. Like the physicist’s particles, people interact, but unlike the physicist’s particles, people interact strategically. That is what game-theory thinking is all about.
To be a successful prognosticator, it is critical to think about how other people think about their problems. It is just as important to think about how other people think about how you think about your problems and theirs. The previous, tedious sentence, by the way, could be repeated ad infinitum to reflect on the information that gets ferreted out when thinking strategically. This and the next chapter—and the science of predictioneering—are about solving the problem of working out what others think, what they think you think, what you think they think, what you think they think you think. … This is the kind of information that physicists rightly don’t give a moment’s thought to when studying the particles that capture their interest—but it is the foundation from which we can see when and how to turn situations to our own advantage.
WHERE WE ARE HEADED
In Game Theory 101 we’ll consider how to look at the world through the eyes of others. For starters, we’ll need to set aside, at least for argument’s sake, our natural optimism about human nature. Game theory urges us to take a cold, hard look at what it means to be a calculating, rational decision maker. Sure, there are some genuinely nice, altruistic people in the world—but that doesn’t mean they aren’t carefully calculating their actions. In fact, we’ll see that even as nice and altruistic a person as Mother Teresa can be scrutinized through the not-so-warm-and-fuzzy eyes of a game theorist. Doing so will help us understand how paths as different as hers and a suicide bomber’s can be equally rational and strategically sensible. It will also help us realize that even some of the most unquestioned received wisdom—such as the existence of something called the national interest—may be just a strategic fiction created by politicians for their own advantage instead of ours. Depressing? Yes. Accurate? You bet.
This chapter will provide us with a framework for the game theorist’s notions of interests, beliefs, and rationality; a sense of how to use logic to cut through the fog of language; and an understanding of strategic behavior that, in conjunction with the previous two concepts, leads to an ability to better map and anticipate the thinking and actions of others.
WHAT ARE THE OTHER GUY’S
INTERESTS AND BELIEFS?
Game theory comes in two primary flavors. Cooperative game theory was invented by John von Neumann and Oskar Morgenstern.1 Their 1947 book on the subject drew a clear and compelling analogy between problems people (or nations) face and parlor games like charades or the name-in-the-hat game, a favorite in my family. These sorts of games deal with players who engage each other, trying to anticipate moves and countermoves, but only in a setting where what they say they will do is the same as what they actually do. That’s why it’s called cooperative game theory—a promise made is a promise kept. Because of this, one big limitation with cooperative game theory, especially in games that involve more than two players, is that it has far too optimistic a view of human nature. In this universe people make deals and keep them. They can be bought off, sure, but once they say they’ll do something, they do it. That means cooperative game theory works fine for zero-sum games where what one side loses equals what the other side wins, but not all that many interesting problems in the world are that cut and dried. When they are not, this original variety of game theory is not nearly as good for my purposes as what has replaced it.
By the early 1950s, the mathematician John
Nash, the subject of A Beautiful Mind and the winner of the 1994 Nobel Prize in Economics, invented a different kind of game theory.2 He drew attention to the propensity people have not to cooperate with one another. Poker players and diplomats use polite terms, like “bluffing,” for what ordinary people mean when they say someone is a liar. In noncooperative games, promises do not necessarily mean anything. Lies are a part of strategizing. Promises are kept when a player decides it’s in her interest to do what she promised. When promises and interests differ, people renege, they break their word, they cheat, they do whatever they think will benefit them most. Of course, they know that bluffing and cheating can be costly. Therefore, they take prospective costs as well as benefits into account. In fact, raising costs is one way, albeit a difficult and painful way, of encouraging people to be truthful. Indeed, that is exactly the purpose behind meeting and then raising someone’s bet in poker or calling car dealers instead of going in to see them.
The view of people as cold, ruthless, and self-interested is at the heart of game-theory thinking. There may be room for nice guys, but not much. Most of the time, nice guys really do finish last. Those who will throw themselves on a hand grenade to save their fellows, well, they do so and then, tragically, they are dead. They are out of the game of life. We remember them, we honor them, we extol them, but we just don’t compete with them, because they are not here to compete with us. Such good souls need not occupy much of our time. Or, if they do, we applied game theorists take a cynical view and look for how suicide might benefit them. There might be virgins in heaven, or, as with kamikaze pilots in World War II, Crusaders in the Middle Ages, and some suicide bombers today, there might be significant financial incentives such as cash payments and debt forgiveness to their families in exchange for their sacrifice.
The Predictioneer’s Game: Using the Logic of Brazen Self-Interest to See and Shape the Future Page 3