Blog

The Colonel Blotto Game: How Underdogs Can Win

If you’ve ever wondered why underdogs win or how to improve your odds of winning when you’re the underdog, this article on The Colonel Blotto Game is for you.

***

There is a rich tradition of celebrating wins by the weak—while forgetting those who lost—including the biblical Story of David vs. Goliath. It is notable, that “David shunned a traditional battle using a helmet and sword and chose instead to fight unconventionally with stones and a slingshot,” says Michael Mauboussin.

Luckily, David was around before Keynes said: “It is better to fail conventionally than to succeed unconventionally.” Turns out, if you’re an underdog, David was onto something.

Despite the fact it is not as well known as the Prisoners’ Dilemma, the Colonel Blotto Game can teach us a lot about strategic behavior and competition.

Underdogs can change the odds of winning simply by changing the basis of competition.

So what exactly is the Colonel Blotto Game and what can we learn from it?

In the Colonel Blotto game, two players concurrently allocate resources across n battlefields. The player with the greatest resources in each battlefield wins that battle and the player with the most overall wins is the victor.

An extremely simple version of this game would consist of two players, A and B, allocating 100 soldiers to three battlefields. Each player’s goal is to create favorable mismatches versus his or her opponent.

According to Mauboussin, “The Colonel Blotto game is useful because by varying the game’s two main parameters, giving one player more resources or changing the number of battlefields, you can gain insight into the likely winners of competitive encounters.”

To illustrate this point, Malcolm Gladwell tells the story of Vivek Ranadivé:

When Vivek Ranadivé decided to coach his daughter Anjali’s basketball team, he settled on two principles. The first was that he would never raise his voice. This was National Junior Basketball—the Little League of basketball. The team was made up mostly of twelve-year-olds, and twelve-year-olds, he knew from experience, did not respond well to shouting. He would conduct business on the basketball court, he decided, the same way he conducted business at his software firm. He would speak calmly and softly, and convince the girls of the wisdom of his approach with appeals to reason and common sense.

The second principle was more important. Ranadivé was puzzled by the way Americans played basketball. He is from Mumbai. He grew up with cricket and soccer. He would never forget the first time he saw a basketball game. He thought it was mindless. Team A would score and then immediately retreat to its own end of the court. Team B would inbound the ball and dribble it into Team A’s end, where Team A was patiently waiting. Then the process would reverse itself. A basketball court was ninety-four feet long. But most of the time a team defended only about twenty-four feet of that, conceding the other seventy feet.

Occasionally, teams would play a full-court press—that is, they would contest their opponent’s attempt to advance the ball up the court. But they would do it for only a few minutes at a time. It was as if there were a kind of conspiracy in the basketball world about the way the game ought to be played, and Ranadivé thought that that conspiracy had the effect of widening the gap between good teams and weak teams. Good teams, after all, had players who were tall and could dribble and shoot well; they could crisply execute their carefully prepared plays in their opponent’s end. Why, then, did weak teams play in a way that made it easy for good teams to do the very things that made them so good?

Basically, the more dimensions the game has the less certain the outcome becomes and the more likely underdogs are to win.

In other words, adding battlefields increases the number of interactions (dimensions) and improves the chances of an upset. When the basketball team cited by Malcolm Gladwell above started a full court press, it increased the number of dimensions and, in the process, substituted effort for skill.

The political scientist Ivan Arreguín-Toft recently looked at every war fought in the past two hundred years between strong and weak combatants in his book How the Weak Win Wars. The Goliaths, he found, won in 71.5 percent of the cases. That is a remarkable fact.

Arreguín-Toft was analyzing conflicts in which one side was at least ten times as powerful—in terms of armed might and population—as its opponent, and even in those lopsided contests, the underdog won almost a third of the time.

In the Biblical story of David and Goliath, David initially put on a coat of mail and a brass helmet and girded himself with a sword: he prepared to wage a conventional battle of swords against Goliath. But then he stopped. “I cannot walk in these, for I am unused to it,” he said (in Robert Alter’s translation), and picked up those five smooth stones.

Arreguín-Toft wondered, what happened when the underdogs likewise acknowledged their weakness and chose an unconventional strategy? He went back and re-analyzed his data. In those cases, David’s winning percentage went from 28.5 to 63.6. When underdogs choose not to play by Goliath’s rules, they win, Arreguín-Toft concluded, “even when everything we think we know about power says they shouldn’t.”

Arreguín-Toft discovered another interesting point: over the past two centuries the weaker players have been winning at a higher and higher rate. For instance, strong actors prevailed in 88 percent of the conflicts from 1800 to 1849, but the rate dropped very close to 50% from 1950 to 1999.

After reviewing and dismissing a number of possible explanations for these findings, Arreguín-Toft suggests that an analysis of strategic interaction best explains the results. Specifically, when the strong and weak actors go toe-to-toe (effectively, a low n), the weak actor loses roughly 80 percent of the time because “there is nothing to mediate or deflect a strong player‘s power advantage.”

In contrast, when the weak actors choose to compete on a different strategic basis (effectively increasing the size of n), they lose less than 40 percent of the time “because the weak refuse to engage where the strong actor has a power advantage.” Weak actors have been winning more conflicts over the years because they see and imitate the successful strategies of other actors and have come to the realization that refusing to fight on the strong actor’s terms improves their chances of victory. This might explain what’s happening in the Gulf War.

In the Gulf War, the number of battlefields (dimensions) is high. Even though substantially outnumbered, the Taliban, have increased the odds of “winning,” by changing the base of competition, as they did previously against the superpower Russians. It also explains why the strategy employed by Ranadivé’s basketball team, while not guaranteed to win, certainly increased the odds.

Mauboussin provides another great example:

A more concrete example comes from Division I college football. Texas Tech has adopted a strategy that has allowed it to win over 70 percent of its games in recent years despite playing a highly competitive schedule. The team’s success is particularly remarkable since few of the players were highly recruited or considered “first-rate material” by the professional scouts. Based on personnel alone, the team was weaker than many of its opponents.

Knowing that employing a traditional game plan would put his weaker team at a marked disadvantage, the coach offset the talent gap by introducing more complexity into the team’s offense via a large number of formations. These formations change the geometry of the game, forcing opponents to change their defensive strategies. It also creates new matchups (i.e., increasing n, the number of battlefields) that the stronger teams have difficulty winning. For example, defensive linemen have to drop back to cover receivers. The team’s coach explained that “defensive linemen really aren’t much good at covering receivers. They aren’t built to run around that much. And when they do, you have a bunch of people on the other team doing things they don’t have much experience doing.” This approach is considered unusual in the generally conservative game of college football.

While it’s easy to recall all the examples of underdogs who found winning strategies by increasing the number of competition dimensions, it’s not easy to recall all of those who, employing similar dimension enhancing strategies, have failed.

Another interesting point is why teams who are likely to lose use conventional strategies, which only increase the odds of failure?

According to Mauboussin:

What the analysis also reveals, however, is that nearly 80 percent of the losers in asymmetric conflicts never switch strategies. Part of the reason players don’t switch is that there is a cost: when personnel training and equipment are geared toward one strategy, it’s often costly to shift to another. New strategies are also stymied by leaders or organizational traditions. This type of inertia appears to be a consequential impediment to organizations embracing the strategic actions implied by the Colonel Blotto game.

Teams have an incentive to maintain a conventional strategy, even when it increases their odds of losing. Malcolm Gladwell explores:

The consistent failure of underdogs in professional sports to even try something new suggests, to me, that there is something fundamentally wrong with the incentive structure of the leagues. I think, for example, that the idea of ranking draft picks in reverse order of finish — as much as it sounds “fair” — does untold damage to the game. You simply cannot have a system that rewards anyone, ever, for losing. Economists worry about this all the time, when they talk about “moral hazard.” Moral hazard is the idea that if you insure someone against risk, you will make risky behavior more likely. So if you always bail out the banks when they take absurd risks and do stupid things, they are going to keep on taking absurd risks and doing stupid things. Bailouts create moral hazard. Moral hazard is also why your health insurance has a co-pay. If your insurer paid for everything, the theory goes, it would encourage you to go to the doctor when you really don’t need to. No economist in his right mind would ever endorse the football and basketball drafts the way they are structured now. They are a moral hazard in spades. If you give me a lottery pick for being an atrocious GM, where’s my incentive not to be an atrocious GM?

Key takeaways:

  • Underdogs improve their chances of winning by changing the basis for competition and, if possible, creating more dimensions.
  • We often fail to switch strategies because of a combination of biases, including social proof, status quo, commitment and consistency, and confirmation.

Malcolm Gladwell is a staff writer at the New Yorker and the author of The Tipping Point: How Little Things Make a Big Difference, Blink, Outliers and most recently, What the Dog Saw.

Michael Mauboussin is the author of More More Than You Know: Finding Financial Wisdom in Unconventional Places and more recently, Think Twice: Harnessing the Power of Counterintuition.

Fortune’s Summer CEO Reading List

Right after Jamie Dimon unveiled his summer reading list for interns, Fortune polled a number of executives to find out what’s on their summer reading list.

Brad Alford, Chairman and CEO, Nestlé USA
1776, by David McCullough
Drive, by Daniel Pink

Mary Erdoes, CEO, JP Morgan Asset Management
The Facebook Effect: The Inside Story of the Company that is Connecting the World, by David Kirkpatrick
On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, by Henry M. Paulson

Jim O’Donnell, President, BMW
Crash Course: The American Automobile Industry’s Road from Glory to Disaster, by Paul Ingrassia
Jenkins at the Majors: Sixty Years of the World’s Best Golf Writing, from Hogan to Tiger, by Dan Jenkins

Marc Cenedella, founder and CEO, The Ladders
The Big Short: Inside the Doomsday Machine, by Michael Lewis
Churchill’s Empire: The World That Made Him and the World He Made, by Richard Toye
Slaughterhouse Five, by Kurt Vonnegut

Alan Miller, CEO, Universal Health (UHS, Fortune 500)
Churchill’s Empire: The World That Made Him and the World He Made, by Richard Toye
The Big Short: Inside the Doomsday Machine, by Michael Lewis
Presidential Leadership: 15 Decisions that Changed the Nation, by Nick Ragone

Greg Sebasky, CEO, Philips Electronics North America
Dynamics of Taking Charge, by John Gabarro
Good to Great, by Jim Collins
Food Rules, by Michael Pollan
This Time Is Different, by Carmen Reinhart and Kenneth Rogoff

Lisa Stone, CEO, BlogHer
Designing the Obvious: A Common Sense Approach to Web Application Design, by Robert Hoeckman
Bite Me: A Love Story, by Christopher Moore

Tom Wilson, CEO, Allstate (ALL, Fortune 500)
Conspirata: A Novel of Ancient Rome, by Robert Harris
The Brothers Karamazov, by Fyodor Dostoevsky
The Fifth Discipline, by Peter Senge

Gilbert Harrison, Chairman, Financo, Inc.
The Sigma Protocol, by Robert Ludlum
The Girl Who Kicked the Hornet’s Nest (Millennium III), by Stieg Larsson
Start-Up Nation: The Story of Israel’s Economic Miracle, by Dan Senor and Saul Singer
The Snowball: Warren Buffett and the Business of Life, by Alice Schroeder

George Barrett, CEO, Cardinal Health (CAH, Fortune 500)
A River Runs Through It, by Norman Maclean
Open, by Andre Agassi
Chaos and Organization in Health Care, by Thomas H. Lee, MD and James J. Mongan, MD

Heath Golden, CEO, Hampshire Group (HAMP)
The Snowball: Warren Buffett and the Business of Life, by Alice Schroeder
The Big Short: Inside the Doomsday Machine, by Michael Lewis

Christine Jacobs, CEO and President, Theragenics Corporation (TGX)
A Man in Full, by Tom Wolfe
Enough, by John C. Bogle

Les Berglass, Chairman, Berglass and Associates
China in the 21st Century,, by Jeffrey Wasserstrom
Last Stand, by Nathaniel Philbrick
Nomad, by Ayaan Hirsi Ali

Jim Greenwood, CEO, Concentra
Why Is Everyone Smiling, by Paul Spiegelman
47 Ways to Make Your Organization Exceptional, by John Miller

Stephen Wiehe, CEO, SciQuest
61 Hours, by Lee Childs

If you like lists, you’ll like Jamie Dimon’s Summer Reading List for Interns

Youngme Moon: On Business Competition and Escaping the Competitive Herd

There are many ways companies compete with one another. Unfortunately, a lot of those ways seem like nothing more than an expensive route to commoditization.

Companies are relentless in their pursuit of finding their weaknesses. They hire consultants, create branding maps, and solicit customer feedback. In our hyper-competitive world, this feedback tells us what we’re missing—our weaknesses.

Companies, like people, fall into the habit of thinking the way to be better is to become more like everyone else.

  • Jane’s company just introduced a new line of green worms? We need green worms too preferably caffeine enhanced green worms.
  • Bob decided to offer a new service? We need a new service too!
  • When you ask your customers what they want they respond with what you’re missing.
  • When consultants compare your products to others they tell you what the competition offers that you don’t.

“A funny thing happens when you begin to capture competitive differences on paper”, says Harvard Professor Youngme Moon in her book Different: Escaping the Competitive Herd, “there is a natural inclination for folks in the competitive set to focus on eliminating differences rather than accentuating them.”

Eliminating Differences

Our brains have been wired since birth to eliminate our differences.

We’ve all received school report cards. If you’re like most people, at some point or another, you discovered you were below the class average in something. We all knew our parents would pick up on that weakness right away.

I cringed before coming home if I was even a hair below average in anything. After a mother saw that report card, it didn’t matter how awesome you were in physics and math. The only thing that mattered was the fact that you were below average in art.

If your mother was like my mother, you wouldn’t hear the end of it until you were once again average in art.

As adults, the only thing that has changed is who gives the report card.

Managers across the country hand out performance reviews that highlight your strengths and weaknesses. Of course, your boss wants you to address those weaknesses. He wants you to be more like everyone else. And since keeping your job is a pretty big incentive, you eagerly put your head down and do what you’ve done your whole life: rather than accentuate the differences you address your weaknesses and, in the process, become more average and indistinguishable from everyone else.

In the process, you move increasingly towards becoming a commodity.

Competition

It’s like we’re back in school all over; competitors and customers are telling us what we don’t have—where we’re below average. Only now this isn’t grade school. The stakes are higher. It’s winner take all and our competitive spirits take over. Except, increasingly, there is no winner.

Consumers can’t tell company Y from Company X. Shelves in grocery stores are full of products that are all essentially the same. Companies think that the way to improve their laundry detergent is simply to add a new, previously unknown, fragrance. Being more of the same is, according to Moon, making brand loyalty harder to find.

Of course, if consumers pay close attention, these products have minute differences. But most of these differences are essentially meaningless.

Competing by eliminating our differences seems like nothing more than an expensive route to commoditization.

  • When one airline introduced frequent flier miles the rest soon followed and the industry offerings were, once again, almost indistinguishable.
  • When the Westin started offering the Heavenly Bed as a way to differentiate itself from the competition, almost immediately most other hotels at the same price point upgraded their mattresses too. The only problem was that room rates didn’t increase to make up for the new investment. When everyone can offer essentially the same bed it becomes hard to differentiate yourself and raise prices in the process.

Ultimately, all of the advantages flow to the customers (and the mattress companies).

According to Moon, “The more generous the baseline value proposition becomes within the category, the easier it becomes for consumers to become indifferent and the more expensive it becomes for businesses to compete.” Investing in differentiation without the ability to increase prices or market share only reduces returns.

In the race to become more like everyone else, companies often don’t think through the whole problem.

They “don’t do the second step of the analysis which is to determine how much is going stay home and how much is just going to flow through to the customer,” says longtime investor Charlie Munger.

I’ve never seen a single projection incorporating that second step in my life. And I see them all the time. Rather, they always read: This capital outlay will save you so much money that it will pay for itself in three years. So you keep buying things that will pay for themselves in three years. And after 20 years of doing it, somehow you’ve earned a return of only about 4% per annum.

If this sounds vaguely familiar it should. It’s a variation of the prisoners’ dilemma; the best choice for all companies is not the best choice for each individual company.

I’m not saying that all competition based on product augmentation (either through new sub-categories or new features) is a flawed strategy. Under the right circumstances, some of these investments can, and will, pan out. I am saying that if your business is pursuing one of these strategies as a means of differentiating yourself from competition, you need to critically think through this strategy.

Read more in Youngme Moon’s Book—Different: Escaping the Competitive Herd

Jamie Dimon’s Summer Reading List for Intern’s

JP Morgan Chase had a town hall for summer interns yesterday.

Apparently quite a few people asked Dimon for a reading list. He e-mailed them back the following list of his favorite books “which includes a variety of business and history books.”

Business
The World is Flat
Competitive Strategy: Techniques for Analyzing Industries and Competitors
Security Analysis – Classic 1940 Edition
The Intelligent Investor
Execution – The Discipline of Getting Things Done<
Jack: Straight From the Gut
Sam Walton – Made in America
Double your Profits in 6 Months or Less
Built from Scratch
Only the Paranoid Survive
Built to Last

 

History Bio
Founding Brothers: The Revolutionary Generation
Autobiography of Ben Franklin
Lincoln at Gettysburg: The Words that Remade America
Undaunted Courage: Meriwether Lewis, Thomas Jefferson, and the Opening of the American West
Eisenhower: Soldier and President
The Rise of Theodore Roosevelt
Washington: The Indispensable Man
Lincoln
Personal Memoirs of U.S. Grant
Team of Rivals: The Political Genius of Abraham Lincoln

 

History Other
A Short History of Nearly Everything
Guns, Germs, and Steel: The Fates of Human Societies
Complexity: The Emerging Science at the Edge of Order and Chaos
A History of Knowledge: Past, Present, and Future
The Clash of Civilization and the Remaking of World Order
The Wealth and Poverty of Nations: Why Some are so Rich and Some so Poor

Behavioral Economics Reading List

Are you looking for good books to read on Behavioral Economics or Behavioral Psychology? This is a list of my best Behavioral Economics books of all time. If you only want to read a few, check out the first three which will give you a firm introduction to everything you need to know.

Judgement in Managerial Decision Making (awesome)
When faced with a decision, we all believe we’re weighing the facts objectively and making rational, thoughtful decisions. In fact, science tells us that in situations requiring careful judgment, every individual is influenced by his or her own biases to some extent. Drawing on the very latest behavioral decision research this book examines judgment in a variety of managerial contexts and provides important insights that can help you make better managerial decisions.

Influence: The Psychology of Persuasion
Should be required Reading.

Nudge: Improving Decisions about Health, Wealth, and Happiness*
“This book is terrific. It will change the way you think, not only about the world around you and some of its bigger problems, but also about yourself.” -Michael Lewis

Why Smart People Make Big Money Mistakes
Gary Belsky and Thomas Gilovich reveal the psychological forces — the patterns of thinking and decision making — behind seemingly irrational behavior. They explain why so many otherwise savvy people make foolish financial choices: why investors are too quick to sell winning stocks and too slow to sell losing shares, why home sellers leave money on the table and home buyers don’t get the biggest bang for their buck, why borrowers pay too much credit card interest and savers can’t sock away as much as they’d like, and why so many of us can’t control our spending.

Breakdown of Will
Ainslie argues that our responses to the threat of our own inconsistency determine the basic fabric of human culture. He suggests that individuals are more like populations of bargaining agents than like the hierarchical command structures envisaged by cognitive psychologists.

Think Twice: Harnessing the Power of Counterintuition
In Think Twice, Michael Mauboussin shows you how to recognize-and avoid-common mental missteps, including: Misunderstanding cause-and-effect linkages; Aggregating micro-level behavior to predict macro-level behavior; Not considering enough alternative possibilities in making a decision; Relying too much on experts

Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being
Monetary incentives are counter-productive in team environments that succeed in creating a culture of identity that fosters teamwork, where mission understanding and commitment are core to performance.

Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism*
Akerlof and Shiller reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery. Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government–simply allowing markets to work won’t do it.

Predictably Irrational: the Hidden Forces that Shape our Decisions*
Ariely explains how expectations, emotions, social norms, and other invisible, seemingly illogical forces skew our reasoning abilities. Not only do we make astonishingly simple mistakes every day, but we make the same types of mistakes. We consistently overpay, underestimate, and procrastinate. We fail to understand the profound effects of our emotions on what we want, and we overvalue what we already own.

Rational Decisions
A concise, accessible, and expert view on Bayesian decision making.

The Irresistible Pull of Irrational Behaviour
What makes people act irrationally? This book explores the submerged mental drives that undermine rational action, from the desire to avoid loss to a failure to consider all the evidence or to perceive a person or situation beyond the initial impression and the reluctance to alter a plan that isn’t working.

Advances in Behavioral Economics
Advances in Behavioral Economics will serve as the definitive one-volume resource for those who want to familiarize themselves with the new field or keep up-to-date with the latest developments.

Behavioral GameTheory: Experiments in Strategic Interaction
Colin Camerer, one of the field’s leading figures, uses psychological principles and hundreds of experiments to develop mathematical theories of reciprocity, limited strategizing, and learning, which help predict what real people and companies do in strategic situations. Unifying a wealth of information from ongoing studies in strategic behavior, he takes the experimental science of behavioral economics a major step forward.

Behavioral Economics and its Applications
In this volume, some of the world’s leading thinkers in behavioral economics and general economic theory make the case for a much greater use of behavioral ideas in six fields where these ideas have already proved useful but have not yet been fully incorporated–public economics, development, law and economics, health, wage determination, and organizational economics.

Explaining Social Behavior: More Nuts and Bolts for the Social Sciences
Jon Elster offers an overview of key explanatory mechanisms in the social sciences, relying on hundreds of examples and drawing on a large variety of sources-psychology, behavioral economics, biology, political science, historical writings, philosophy and fiction.

Ulysses and the Sirens: Studies in Rationality and Irrationality
Elster critiques the notion of rationality in the economist’s sense, as a faculty that is concerned with maximizing the satisfaction of agents’ present preferences. He contrasts this notion of locally maximizing rationality with what can be called globally maximizing rationality. This latter concept is perhaps best illustrated by those interesting situations where the best “strategy” is irrationality.

Behavioural Finance
William Forbes lays out the fundamentals of behavioral finance.

The Psychology of Investing
Traditional finance has focused on developing the tools that investors use to optimize expected return and risk. Understanding the motivations behind this behavior is extremely important when applying these financial tools.

Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing
An entertaining, yet scholarly overview of the subject.

Economics and Psychology: A Promising New Cross-Disciplinary Field
The essays in Economics and Psychology take a broad view of the interface between these two disciplines, going beyond the usual focus on “behavioral economics.” As documented in this volume, the influence of psychology on economics has been responsible for a view of human behavior that calls into question the assumption of complete rationality (and raises the possibility of altruistic acts), the acceptance of experiments as a valid method of economic research, and the idea that utility or well-being can be measured.

Irrational Exuberence*
A cult-classic at the time it was written.

An Introduction to Behaviorial Economics
…a superb introduction to the field of behavioral economics, suitable not only as an introductory text, but also as an entry-point for those desiring an engaging overview of the field.

Moral Markets : the Critical Role of Values in the Economy
This collection of essays provides an accessible guided tour of the frontier of current research in sociology, economics, biology and philosophy.

The Paradox of Choice: Why More Is Less
…we are faced with far too many choices on a daily basis, providing an illusion of a multitude of options when few honestly different ones actually exist.

More Than You Know: Finding Financial Wisdom in Unconventional Places
A must read.

The Little Book of Behavioral Investing: How not to be your own worst enemy
…will enable you to identify and eliminate behavioral traits that can hinder your investment endeavors and show you how to go about achieving superior returns in the process.

Morals and Markets: an Evolutionary Account of the Modern World
Economist and evolutionary game theorist Daniel Friedman demonstrates that our moral codes and our market systems-while often in conflict-are really devices evolved to achieve similar ends, and that society functions best when morals and markets are in balance with each other.

Heuristics and Biases: The Psychology of Intuitive Judgement
When are people’s judgments prone to bias, and what is responsible for their biases? This book compiles psychologists’ best attempts to answer these important questions.

Moral Sentiments and Material Interests: the Foundations of Cooperation in Economic Life
“This book presents social science at its interdisciplinary best: an exhilarating mix of game theory, evolutionary biology, experimental economics, cultural anthropology, grammatology, and policy analysis. It will change our views of how biology and culture together determine social behavior.” —Daniel Kahneman

The Bounds of Reason: Game Theory and the Unification of the Behavioral Sciences
Game theory alone cannot fully explain human behavior and should instead complement other key concepts championed by the behavioral disciplines. Herbert Gintis shows that just as game theory without broader social theory is merely technical bravado, so social theory without game theory is a handicapped enterprise.

The Methodology of Experimental Economics
This book provides the first comprehensive analysis and critical discussion of the methodology of experimental economics, written by a philosopher of science with expertise in the field.

The Handbook of Experimental Economics
…presents a comprehensive critical survey of the results and methods of laboratory experiments in economics.

Thinking and Deciding
has established itself as the required text and important reference work for students and scholars of human cognition and rationality.

Judgement Under Uncertainty: Heuristics and Biases
This volume is an important collection of papers, with relevance to anyone working in fields where decision-making is at the core. This is THE book.

Choices, Values, and Frames
…presents an empirical and theoretical challenge to classical utility theory, offering prospect theory as an alternative framework. Extensions and applications to diverse economic phenomena and to studies of consumer behavior are discussed. The book also elaborates on framing effects and other demonstrations that preferences are constructed in context, and it develops new approaches to the standard view of choice-based utility.

The Construction of Preference
When asked to make a decision, people often don’t really know what they want; they must construct their preferences ‘on the spot’. This book describes the concept of preference construction, tracing the blossoming of this idea within psychology, economics, marketing, law, and environmental policy.

Behavioural Finance: Insights into Irrational Minds and Markets
A good introduction.

Value Investing: Tools and Techniques for Intelligent Investment
why everything you learnt at business school is wrong

A Short History of Financial Euphoria
In this small but witty and well-crafted book, Galbraith chronicles the major speculative episodes, from the seventeenth-century tulipmania to the junk-bond follies of the eighties.

Manias, Panics, and Crashes
…an engaging and entertaining account of the way that mismanagement of money and credit has led to financial explosions over the centuries. Covering such topics as the history and anatomy of crises, speculative manias, and the lender of last resort, this book puts the turbulence of the financial world in perspective.

Devil Take the Hindmost: A History of Financial Speculation
A must read.

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism
Akerlof and Shiller reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery. Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government–simply allowing markets to work won’t do it. In rebuilding the case for a more robust, behaviorally informed Keynesianism, they detail the most pervasive effects of animal spirits in contemporary economic life–such as confidence, fear, bad faith, corruption, a concern for fairness, and the stories we tell ourselves about our economic fortunes–and show how Reaganomics, Thatcherism, and the rational expectations revolution failed to account for them.

Discover Your Inner Economist
An engaging narrator, Cowen offers idiosyncratic strategies for appreciating museum art, for building family trust and cooperation, for writing a personal ad, for reading classic novels that seem boring on first inspection, for surviving torture, for properly practicing self-deception and for most effectively giving to beggars in Calcutta.

Additions to the list in 2011

Thinking, Fast and Slow
Kahneman takes us on a groundbreaking tour of the mind and explains the two systems that drive the way we think. System 1 is fast, intuitive, and emotional; System 2 is slower, more deliberative, and more logical. Kahneman exposes the extraordinary capabilities—and also the faults and biases—of fast thinking, and reveals the pervasive influence of intuitive impressions on our thoughts and behavior. The impact of loss aversion and overconfidence on corporate strategies, the difficulties of predicting what will make us happy in the future, the challenges of properly framing risks at work and at home, the profound effect of cognitive biases on everything from playing the stock market to planning the next vacation—each of these can be understood only by knowing how the two systems work together to shape our judgments and decisions.

Everything Is Obvious: *Once You Know the Answer
“Every once in a while, a book comes along that forces us to re-examine what we know and how we know it. This is one of those books. And while it is not always pleasurable to realize the many ways in which we are wrong, it is useful to figure out the cases where our intuitions fail us.”—Dan Ariely

Priceless: The Myth of Fair Value (and How to Take Advantage of It)
Poundstone dives into the latest psychological findings to investigate how and why prices are allocated.

Strangers to Ourselves: Discovering the Adaptive Unconscious
Wilson attempts to explain why there’s so much about ourselves that we fail to understand, which can lead to misdirected anger.

Born Liars: Why We Can’t Live Without Deceit
“… a lively, engaging read that also makes a bold argument about the role of lying in our lives”

Ulysses Unbound: Studies in Rationality, Precommitment, and Constraints
This provocative book argues that, very often, people may benefit from being constrained in their options or from being ignorant.

What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions
“We all share behavioral traits that are major roadblocks to intelligent financial decisions. Bottom line: if you really want to achieve investment success, understand yourself and eliminate or minimize these traits. This book will help you do exactly that.”—John C. Bogle

Prospect Theory: For Risk and Ambiguity
“This masterful survey of major theories of choice and of their implications for measurement represents two decades of research and teaching by a flawless perfectionist. Wakker’s view of the field is scholarly, coherent and deeply personal.”—Daniel Kahneman

Utility of Gains and Losses: Measurement-Theoretical and Experimental Approaches
…provides a penetrating analysis of the axioms underlying human choice theory and a thorough review of the evidence. Most importantly, he illustrates the process of decomposing theories into testable properties that become the building blocks for better theories. His relentless desire to reformulate theories in response to evidence is what makes this an extraordinary book by an extraordinary scientist.

How Williams Sonoma Inadvertently Sold More Bread Machines

Paying attention to what your customers and clients see can be a very effective way to increase your influence and, subsequently, your business.

Steve Martin, co-author of Yes! 50 Secrets from the Science of Persuasion, tells the story:

A few years ago a well-known US kitchen retailer released its latest bread-making machine. Like any company bringing a new and improved product to market, it was excited about the extra sales revenues the product might deliver. And, like most companies, it was a little nervous about whether it had done everything to get its product launch right.

It needn’t have worried. Within a few weeks, sales had almost doubled. Surprisingly, though, it wasn’t the new product that generated the huge sales growth but an older model.

Yet there was no doubt about the role that its brand new product had played in persuading customers to buy its older and cheaper version.

Persuasion researchers suggest that when people consider a particular set of choices, they often favour alternatives that are ‘compromise choices’. That is, choices that compromise between what is needed at a minimum and what they could possibly spend at a maximum.

A key factor that often drives compromise choices is price. In the case of the bread-making machine, when customers saw the newer, more expensive product, the original, cheaper product immediately seemed a wiser, more economical and attractive choice in comparison.

Paying attention to what your customers and clients see first can be a very effective way to increase your influence and, subsequently, your business. It is useful to remember that high- end and high-priced products provide two crucial benefits. Firstly, they often serve to meet the needs of customers who are attracted to high-price offerings. A second, and perhaps less recognised benefit is that the next-highest options are often seen as more attractively priced.

Bars and hotels often present wine lists in the order of their cheapest (most often the house wine) first. But doing so might mean that customers may never consider some of the more expensive and potentially more profitable wines towards the end of the list. The ‘compromise’ approach suggests that reversing the order and placing more expensive wines at the top of the list would immediately make the next most expensive wines a more attractive choice — potentially increasing sales.

Original source: http://www.babusinesslife.com/Tools/Persuasion/How-compromise-choices-can-make-you-money.html