Implicit in Curve B is another unwritten rule of human behaviour: a reluctance to tinker with the status quo. Nobody is going to jump from the known and certain to the unknown and uncertain unless the known and certain is already extremely unpleasant and painfull Again the logic is simple. The unknown and uncertain offers mixed chances of gain as well as loss for the prospective jumper, and the potential pleasure associated with a gain is outweighed by the risk of major pain associated with a loss. In normal circumstances, therefore, the inclination is do nothing but stay put in familiar territory: it is the preferable option over potential oblivion, no matter what the upside. To use that overworked expression, to shift a person’s paradigm or a nation’s mind-set requires the affected party to have a shock to the system (not smart) or develop an understanding of what may lie on the other side before the shock happens (smarter). That’s why scenarios are so useful: by offering a glimpse of the possible, they act as a catalyst to achieve the leap of understanding necessary for movement. The people of Northern Ireland and Israel need positive scenarios of what their countries could be like if they laid aside centuries of religious animosity. Then they might find one another and move to higher ground. Incidentally, inspirational tales of the past can often achieve the same result. The film Erin Brockovich tells the story of how a sassy, young miniskirted mother took up the cause of an American community, and won a legal case involving contaminated water against a gigantic power utility. It sent a powerful message: when ordinary people put their minds to it, they can do extraordinary things and make a difference. It also helped that the movie starred the Oscar-winning actress with the radiant smile, Julia Roberts!
Sometimes, however, the choice is between the lesser of two evils and showing people that if they don’t do something which prima facie looks against their interest, there is a worse scenario waiting in the wings. For instance, you don’t normally hand money over to a stranger for nothing in return. But if that stranger happens to say “your money or your life” and presses a cocked pistol against your temple, you do hand the money over. The alternative is worse! Dick Turpin, the famous eighteenth-century English highwayman, used this technique very effectively till he was hanged in York in 1739.
Finally, Curve B has an intriguing feature. If the time frame on the left or the right is a date sometime in the future, we discount the losses or gains because they mean less to us. For example, if the adverse effects of smoking or HIV/AIDS were felt immediately, people would be more averse to risking their lives on the immediate gratification involved in smoking a cigarette or having unsafe sex. Equally, monetary gains in the future aren’t worth as much as cash in the bank now. But the area where our natural habit of discounting the future creates a real blind spot is the environment. For the beneficial impact of making sacrifices in our current lifestyle may only be felt in a few generations’ time. And as some wag put it: “Why should we bother about the next generation? They have never done anything for us.” Alas, the short-sightedness highlighted by this observation is becoming more relevant by the day.
It takes two to tango
This brings us to the celebrated example of the “prisoner’s dilemma”, as formulated by the mathematician Albert Tucker. Two men – let’s call them Bill and Ben – are arrested for robbery. They are refused bail and isolated from one another in separate cells. However, the evidence is circumstantial as there are no hard witnesses. It requires one or other of them to confess for the charge of robbery to stick. Otherwise, they will be charged with carrying concealed weapons at the time of their arrest – an offence which carries a considerably lighter sentence. Both know the consequences of their decision to confess or remain silent. If they both confess, they will both get a five-year sentence; if neither confesses, they will both get one year for carrying a concealed weapon; and if one confesses while the other does not, the confessor will go free and the one who remains silent will get twenty years.
What is the best option for each prisoner? If Bill cannot trust Ben, it is arguably best for him to confess in order to limit his downside to five years at worst and zero at best.Ben’s reasoning must be the same. So, as untrusting individuals, they should both confess and get five years. If, however, they are members of the Mafia and have taken the oath of omerta (silence), then it pays for each of them to remain silent and go to jail for one year for the lesser offence.
The dilemma comes in when Bill and Ben are just friends. They are taken to separate interrogation cells without having any chance to compare stories or plan a strategy. The police tell Bill that Ben has already confessed. Bill has to decide whether the police are telling the truth or lying. Is Ben a friend or a double-crosser? The horns of the dilemma are very pointed and sharp for Bill.
There is no logical and satisfactory answer to this conundrum. Depending upon his personal risk profile and regard for Ben, Bill will either play safe and confess to the robbery; or take the plunge and remain silent. The intriguing thing is that this type of dilemma is repeated again and again in real life. Politicians make this judgement call whenever they have something to cover up. Should they rely on their colleagues to keep silent during the probe, in which case the cover-up option offers the best way out. Or should they tell the truth at the outset and take the rap? The problem in the cover-up option is that if they are wrong about their colleagues and the truth surfaces, they are in for the high jump. The cover-up becomes the issue as opposed to the original misdemeanour.
Here’s another illustration from the real world. If I’m a grocer pondering on cutting the prices of my fruit and vegetables, the big question is whether other grocers in the neighbourhood will follow suit. If they do, every grocer will be worse off; and if they don’t, I will grab their customers so I’ll be better off and they will suffer. Perhaps we should instead form a cartel and fix the price of fruit and vegetables for the entire neighbourhood, with the added benefit that it is extremely unlikely that any individual grocer will break ranks and do to me what I’m thinking of doing to him. But that’s precisely why cartels in most countries are illegal, because they are established for the benefit of the producers and at the expense of the consumers. It’s only if you are an international cartel like OPEC that you’ll get away with it. So, generally speaking, open competition is enshrined in law and the pricing dilemma that we’ve just alluded to persists in every player’s mind.
The arms race, which seems to have somewhat abated, once posed the same dilemma to the two superpowers – America and Russia. If I developed a nuclear weapon superior to yours, I was at an advantage. If, however, you responded by creating a new generation of weapon which equated with mine, then neither of us were better off militarily – but we were sure worse off financially. Sense now seems to prevail on both sides; but don’t rule out America exploiting Russia’s precarious financial position to have another go at achieving military superiority. “Son of Star Wars” is reported to be on the drawing board.
We’ve already mentioned the three rules of the game that flow from these examples (just above the ‘curves of pleasure and pain’ graph). Nonetheless, it is worth re-emphasising that no company is an island, as is assumed in many a strategic plan. You have to play scenarios on the responses of the competition to any action you intend to take – before taking it. For example, if you decide to merge with another company to become a larger entity, then two of your competitors may decide to combine into an even larger one. Vicious and virtuous circles also display the same feedback principle, this time with your customers. Hike your prices too much and your customers disappear so that you have to hike them even more to maintain your revenue. Lower your prices and you may attract more customers than you anticipated, in which case you can lower them even more. As Isaac Newton said, for every action there is a reaction. Hence, there is no point in waltzing into a boardroom with a proposal, entering into negotiations on a contract or presenting a sales pitch to potential customers unless you’ve worked through the range of reactions which are outside your control. The penalty, should you not do this homework, may be an undignified exit with arms flailing and a bruised ego. Not worthy of a fox.
Key uncertainties