In which Rebel Without A Cause illuminates the risks and the rewards of making credible commitments.
The Bodleian Library shuts for the week after Easter. So instead of burrowing through its dusty books and periodicals, I was forced to rummage among the old videos at home. Still, there is plenty to be learnt there about business and economics.
Not, however, from Wall Street, in which Gordon Geko famously pronounced that greed was good. Or from The Bonfire of the Vanities – Hollywood was unable to accept the essentially desolate nature of Tom Wolfe’s critique of modern New York, and messed up the story by appointing a wise old black judge to ensure a happy ending for everyone involved.
I found more of interest in James Dean’s cult movie of the 1950s, Rebel Without a Cause. The highlight of the film is a game called chicken. Dean and his rival each drive a car towards a cliff. You win the game by jumping from the car later than the other player, but still in time to avert the cliff.
Chicken is a familiar business situation. If you blink first, you lose. But if neither of you blinks at all, you lose still more. Every negotiation has elements of chicken about it. Still, the Dean version of the game is a difficult one to analyse. To learn about the mathematics of movies, it is easier to start with the simpler version of chicken that you find in Stand By Me.
Here, the two protagonists each drive their car towards each other, on a road wide enough only to accommodate one vehicle. You win the game if you drive straight ahead while your rival swerves. If you both swerve, you both look foolish. And if neither swerves, disaster lies ahead.
This too is a common business problem. A market opportunity is profitable if one firm goes for it, but if many firms try all will lose money. London financial services after big bang were a classic chicken game. Twenty-eight firms attempted market making in gilts, for example, and so long as that number tried none could possibly make money. Only when enough had jumped, or swerved, might profits be earned.
There are several surprising lessons from chicken games. One is that – as was true in financial services in London – it is possible to lose far more than any potential gain could ever have justified. The problem is that once you are sucked into such a game, it always seems to pay to spend a little more. This is often true in races for patents and innovations. Silicon Valley is full of exponents of chicken, and its investors are playing the same game.
Perhaps we should refuse to play chicken. Yet if you stay out of these games, you pass winning opportunities by. You can develop a strong position if you can make an irrevocable commitment. If you could tear off the steering wheel and throw it out the window, you would be a certain winner in Rebel Without a Cause or Stand by Me.
This is the paradox of Alexander the Great burning his boats, or Grant’s attack in Vicksburg: in the American Civil War. You can do better by restricting your options. If you can’t quit, or risk losing a reputation as a stayer, you are a formidable opponent at chicken. That is how IBM won the standards battle in personal computers and why Rupert Murdoch had done so well in many of the markets he has entered.
But the greatest paradox of all is that it is often best to adapt random behaviour in chicken games. It is possible to write down the mathematics of the problem faced by the two groups of boys in Stand By Me, and to show that in general a good solution for each is to swerve sometimes and to stick sometimes. You can even calculate how often you should swerve and how often you should stick.
But how to decide which option to adopt? It’s a mistake to rely on any objective criteria. If you did, then your opponent might guess at how you made your decision, and act accordingly. I couldn’t find a movie with the child’s game of stone, scissors, paper, but it illustrates the point. Stone sharpens scissors, but is covered by paper, paper blunts scissors. Any predictable behaviour loses, and randomness wins half the time against another random player. The only way to keep your strategy secret from others is not to know what it is yourself.
Now this is not a recommendation that business strategies should be based on the toss of a coin, although that might be safer than some. As more and more firms speculate about the restructuring of the industries they are in, it is hard not to recall Josh Billings’ observation that the trouble with people is not that they don’t know but that they know so much that ain’t so. Not knowing may still be better than knowing: random behaviour more profitable than rational analysis. Limiting your flexibility may yield higher payoffs, and you can lose far more from chicken game than you could ever hope to win. Learn to play chicken in business when you must, but learn from the adolescent rites of passage in Rebel Without a Cause and Stand by Me that it is usually better not to be playing these games at all.