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57Principle · Group 8 · Anchor principle

Strategic Interdependence

Game theory in business strategy

“Your best move depends on what the others do, and their best move depends on yours; that is why you never plan against a world that stands still.”

In most situations that matter, you don’t decide alone. What is best for you depends on what others do, and the others are thinking about you in exactly the same way.

Group 8: Interaction, Alliances and NegotiationT5 Game Theory, Negotiation and Conflict
Go to the in-depth section ↓
Two teal circles face each other, each with a short line like a lever; when the left one throws its lever, new dots light up on the right and the right circle turns toward them, then the other way around. An arc runs back and forth between the two until it closes into a ring, and when both throw their levers at the same time, a golden dot appears in the middle that neither could have created alone.
In short

Your best move depends on what the others do, and their best move depends on yours; that is why you never plan against a world that stands still.

What it’s about: In most situations that matter, you don’t decide alone. What is best for you depends on what others do, and the others are thinking about you in exactly the same way. A farmer who sows seed takes weather and soil into account, and they don’t respond to him. A company that cuts its prices takes its competitors into account, and they certainly do respond. That difference is what separates a plan from a strategy.

In depth

The principle in detail

Three steps through the principle: grasp it, place it, put it to work. Open each topic on its own.

The core messageCore statement and 3 clarifications
In essence

The outcome of your actions also depends on the actions of others, who in turn take their cue from you. Good strategy factors in the response.

It does not say
That the others look out only for their own advantage. People also decide on the basis of fairness, conscience and history.
It does not say
That every situation is a game against an opponent. Natural events don’t respond to your move, and neither does anyone when you are a small player in a very large market.
It also says
A state in which everyone has chosen the best response to the others can be bad for all of them. Then it helps to change the rules of the game itself.
The explanationHow the principle works and what matters

If you understand mutual dependence, you can shape it: change incentives, make commitments credible, build trust through repeated encounters.

The question

Before every important step, it is therefore worth asking: what will the others do if I do this, and what will they do if they know I think this way?

The signs3 signs when you heed it · 3 when you overlook it
When you heed it
  • Before important decisions, you think through how colleagues, customers or competitors will respond.
  • You talk to those affected before things escalate.
  • You look for ways to change incentives so that cooperation pays off for everyone.
When you overlook it
  • You plan as if the others would stand still, and their reaction takes you by surprise.
  • You assume they act only out of self-interest.
  • You remain stuck with others in a bad situation because any single attempt to break out seems risky.
The backgroundFrom John von Neumann and Oskar Morgenstern’s work “Theory of Games and Economic Behavior” (1944).
  1. 1944
    OriginJohn von Neumann and Oskar Morgenstern

    Theory of Games and Economic Behavior

  2. 1950
    SupplementedJohn Nash

    Doctoral dissertation at Princeton

  3. 1960
    SupplementedThomas C. Schelling

    The Strategy of Conflict

  4. Tradition T5
    TraditionGame Theory, Negotiation and Conflict

    Thomas C. Schelling, Robert Axelrod, Herman Kahn, Roger Fisher and William Ury

    See the tradition on the Origin page
Read more: the full background

From John von Neumann and Oskar Morgenstern’s work “Theory of Games and Economic Behavior” (1944). Supplemented by John Nash’s equilibrium (1950) and Thomas C. Schelling’s “The Strategy of Conflict” (1960).

The research4 sources: 2 classics, 1 theory, 1 primary study · 1944–2012 · with limitations of the research
4 sources1944–2012 period2 classics1 theory1 primary study
Strength of evidence
  1. weak
  2. moderate
  3. strong

The mutual dependence of decisions is the mathematically developed foundation of game theory; however, the models often fail to predict precisely how people actually behave within it.

  1. 1944
    Classic
    John von Neumann and Oskar Morgenstern

    “Theory of Games and Economic Behavior”: economic behavior as a game in which everyone has to factor in the decisions of the others.

  2. 1950
    Theory
    John Nash

    Doctoral dissertation at Princeton: the equilibrium in which everyone has chosen the best response to the strategies of the others and no one can do better alone.

  3. 1960
    Classic
    Thomas C. Schelling

    “The Strategy of Conflict”: applies the logic of interdependent decisions to politics, deterrence and negotiation.

  4. 2012
    Primary study
    Martijn J. van den Assem, Dennie van Dolder and Richard H. Thaler

    “Split or Steal?”: 574 contestants on the game show “Golden Balls,” with average stakes of more than $20,000; 52.8% split, even though stealing never does worse.

Where the research reaches its limits
  • The principle assumes that the others perceive your moves and can respond to them.
  • In very large markets where you are only a small player, or in the face of natural events, there is no opponent.
  • Many models assume rational players; real people often act differently.
  • The analysis of “Golden Balls” also found little evidence that contestants split only when they expected the other person to do the same.
  • If you only calculate and don’t understand what the other person feels and has learned, you will be wrong even with the best model.
Read more: what research shows

In 1838, Antoine Augustin Cournot studied how two suppliers adjust their quantities to each other without colluding. In 1944, John von Neumann and Oskar Morgenstern described economic behavior as a game in which everyone has to factor in the decisions of the others. In 1950, John Nash developed the equilibrium that bears his name today, for any number of players: a state in which each player has chosen the best response to the moves of the others. In 1960, Thomas C. Schelling applied this thinking to deterrence and negotiation. An analysis by Martijn J. van den Assem, Dennie van Dolder and Richard H. Thaler shows how people actually decide: in 287 episodes of the game show “Golden Balls,” 52.8% of contestants chose to split, even though stealing never does worse. So people cooperate more often than pure theory would lead you to expect.

The related principles16 Know the Enemy and Yourself · 61 Security Dilemma · 62 Tit for Tat · 64 Credible Commitment
Tit for TatCredible Commitment

To go deeper, see 62 Tit for Tat (how mutual dependence turns into cooperation in repeated encounters) and 64 Credible Commitment (how you deliberately change what others expect)

Know the Enemy and Yourself

16 Know the Enemy and Yourself provides the knowledge without which you cannot estimate how others will respond

Security Dilemma

61 Security Dilemma shows how mutual dependence without trust leads into a spiral

Read more: the full text

To go deeper, see 62 Tit for Tat (how mutual dependence turns into cooperation in repeated encounters) and 64 Credible Commitment (how you deliberately change what others expect). 16 Know the Enemy and Yourself provides the knowledge without which you cannot estimate how others will respond; 61 Security Dilemma shows how mutual dependence without trust leads into a spiral.

The action steps5 things you can actually do

  1. Before an important decision, write down whom it affects and how each of them is likely to respond.

  2. Think one step further: what will the others do if they know that you think this way?
  3. Don’t factor in self-interest alone. Ask what fairness, history and conscience will do on the other side.

  4. If you are stuck with others in a situation that is bad for everyone, look for rules that make breaking out safer for all: binding agreements, shared goals, repeated encounters.

  5. Make commitments that others can rely on. Then they will plan with you instead of against you.
The reflection questions3 questions: In which decision over the coming weeks have you not yet factored in how the others will respond?
  1. In which decision over the coming weeks have you not yet factored in how the others will respond?
  2. Where are you stuck with others in a situation that is bad for everyone and that nobody wants to leave alone?
  3. What would have to change in the rules for cooperation to pay off for everyone?

Take your time with one question. Write down your answer – or talk it over with someone you trust.

To finish
The picture to rememberThe animation once more, with an explanation
  1. Two teal circles face each other, each with a short line like a lever
  2. When the left one throws its lever, new dots light up on the right and the right circle turns toward them, then the other way around
  3. An arc runs back and forth between the two until it closes into a ring, and when both throw their levers at the same time, a golden dot appears in the middle that neither could have created alone
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In context

Group 8: Interaction, Alliances and Negotiation

Guiding question: How do you act when others are in the game too?

Stage 4 of 5: Act with others

Where the 92 principles come from: eight traditions of strategy, from classical war theory to dealing with uncertainty.

More about the origin

Background: WEGVISOR’s own selection from the strategy literature · More about the origin

Examples

The principle in practice

From the different spheres of society.

Education

John Nash and Strategic Interdependence

In 1950, the young mathematician John Nash submits a short doctoral dissertation at Princeton. It shows how to describe situations in which every participant can make the best choice only by taking the choices of the others into account, and in doing so it changes economics.

Strategic Interdependence
Media

Golden Balls, Split or Steal and Strategic Interdependence

At the end of the British game show “Golden Balls,” two contestants decide in secret whether to split or steal. What each of them gets depends entirely on the other’s choice, and that is exactly what reveals how people deal with mutual dependence.

Strategic Interdependence
Business

MAN, the Trucks Cartel and Strategic Interdependence

For 14 years, Europe’s major truck manufacturers collude. Then MAN blows the whistle under the leniency program, goes unpunished and escapes a fine of about €1.2 billion. The cartel breaks apart on the very dependence it was built on.

Strategic Interdependence
Government

Movie: The Dark Knight

In Christopher Nolan’s “The Dark Knight” (2008), the Joker confronts two ferries with a deadly choice: each can blow up the other to save itself. The scene is a lesson in how mutual dependence puts people under pressure, and why it nevertheless doesn’t automatically lead to the worst outcome.

Strategic Interdependence
FAQ

Questions about Strategic Interdependence

What does the principle of Strategic Interdependence say?

Your best course of action depends on the actions of others, who in turn respond to you. That is why good strategy always factors in the other side’s response.

Where does the principle of Strategic Interdependence come from?

As a scientific concept, it comes from game theory, above all from the book “Theory of Games and Economic Behavior” by John von Neumann and Oskar Morgenstern (1944). John Nash and Thomas C. Schelling were key to its further development.

What are some examples of Strategic Interdependence?

Well-known examples are John Nash’s equilibrium from 1950, the final of the game show “Golden Balls” and the leniency program in the European trucks cartel. In film, the ferry scene in “The Dark Knight” shows the principle.

How well is Strategic Interdependence supported by research?

Evidence: strong – the mutual dependence of decisions is the mathematically developed foundation of game theory; however, the models often fail to predict precisely how people actually behave within it.

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