Paper: Learning from Schelling's 'Strategy of Conflict'

My notes on


Meyerson's conclusions up top:

(5) anything in a game's environment or history that focuses the players' attention on one equilibrium may lead them to expect it, and so rationally to play it.

DUSTIN: Cash money only has value because we all assume it has value (This is not strictly true but it's an interesting idea, consider Bitcoin or Tech stocks or Housing prices)
This focal-point effect opens the door for cultural and environmental factors to influence rational behavior ... But in a theoretical model where individuals' preferences are endogenously determined, one might "solve" social problems by teaching the poor to love poverty, or by teaching the powerful to love social justice. Economic analysis of institutions could thus be trivialized by such an assumption that

individuals could be culturally reshaped to fit institutional requirements.

DUSTIN: Idea: Does a North Korean recognize the extent of the propoganda-state they live in? How do you, dear reader, know you have not already been "re-shaped"?
So economists find it more useful to assume that an exogenous selfish materialism characterizes individual preferences. But even without an intrinsic preference for justice,

selfish materialists can be influenced by concepts of justice that operate as focal factors to determine focal equilibria

DUSTIN: Idea is even if we throw away morality, it is individually advantageous to agree on a justice system. The particulars of the justice system are not important, just that the agreement exists. For example, Libertarian ideology is structured around: "individualism, private property, capitalism, equality under the law" cato. Here, this is just one possible set of values (focal factors); from a game theoretic perspective there are other stable solutions.
in games with multiple equilibria. ... the process of negotiating joint expectations of focal equilibrium may be the only sense in which players can truly "co-operate," because the understanding of a focal equilibrium must be shared jointly by all players. As Harsanyi (1961) recognized, theories about cooperative games may then be posed as theories of how focal equilibria can be identified from the payoff allocations that they yield.

(6) Imagine for a moment that we tried to induce people in real games to play the equilibrium that is selected for them by a theory such as Harsanyi and Selten's. The players in these games might think that, in our attempt to coordinate them, we were trying to act as leaders with some kind of authority over them. That is, they might recognize something intrinsically political about our attempt to coordinate them on one equilibrium rather than another, because

one of the basic functions of political leadership is to coordinate people's expectations in games with multiple equilibria.

In this sense, Harsanyi and Selten (1988) were trying to define a neutral political theory, based on a new kind of natural law, which could be compared in scope to the efforts of Thomas Hobbes (1651), albeit in a very different analytical framework. Schelling's response to Harsanyi then could be compared to David Hume's (1748) observation that general public opinion may be the only standard for questions of morals (unlike other areas of philosophical inquiry), because the

fundamental basis of social morals is in people's need to coordinate with each other.

Schelling's focal-point effect should be counted as one of the most important ideas in social theory. Recognizing the fundamental social problem of selecting among multiple equilibria can help us to better understand the economic impact of culture on basic social phenomena such as social relationships, property and justice, political authority and legitimacy, foundations of social institutions, reputations and commitment, international boundaries in peace and war, and even the social use of the divine.

Table 1: A game with good and bad equilibria. (The stag-hunt game.)
(7) As the strategies' names suggest, the different equilibria here can be interpreted as representing, in a simple model, different kinds of interpersonal relationships. The players here can rationally have a friendly relationship, but they can just as rationally have an unfriendly aggressive relationship, even though it makes them both worse off.
Economists have sometimes suggested that a Nash equilibrium that is Pareto-dominated by another Nash equilibrium should never be predicted by our theories. If we included this Pareto constraint in our analytical methodology, then we would get a unique and pleasant prediction in this game, because the good (50,50) equilibrium Pareto-dominates all other equilibria here. But such a methodological assumption would blind us to the

possibility of important social pathologies where people become focused on the bad equilibrium.

Suppose that this game is played in a context where, based on cultural expectations and the experiences of players in similar situations, aggressive behavior becomes the normal expectation. Then each player should rationally respond to this expectation by fulfilling it himself.
Neither player can improve the situation by himself. The pathology of the aggressive equilibrium here is a social pathology that derives from their mutual expectations of each other. To improve individuals' prospects in this game requires a social change, that is, a change of generally held social expectations.
(8) Now imagine two different islands, each of which is inhabited by people who are matched in pairs to play this game each day. Suppose that people on the first island are culturally disposed to focus on the good equilibrium, but on the second island the players are culturally disposed to focus on the bad equilibrium. Then we have a

simple model of impoverishment that is purely cultural in origin.

By modeling local culture as a focal factor, rather than as a factor that affects individuals' preferences, we can meaningfully compare payoffs across the two islands, because moving from one island to the other would not change a player's preferences. The two islands have the same economic fundamentals, but the economic outcomes are worse on the second island because the cultural expectations are different. All individuals on both islands are equally rational, but an individual on the poor island who tried to fix the problem by acting as if he were on the rich island would reduce his own payoff from 20 to 0.

If we want to cure the poverty of the second island, we must get everyone's attention there and somehow get them all to focus instead on the better equilibrium.

Such pathological social expectations can be changed only by someone who perceived as an authority or leader, and who can identify a better Nash equilibrium for them.
Of course the social problems of poverty actually arise in complex social systems where different equilibria are much harder to identify than in this simple example. In a game that has many equilibria, there are typically many more strategy combinations that are not Nash equilibria. A would-be reformer who wants to improve social welfare by changing people's behavior to a better equilibrium must take care to identify a social plan that is in fact a Nash equilibrium, so that nobody can profit by unilaterally deviating from the plan. If a leader tries to change people's expectations to some plan that is not a Nash equilibrium, then his exhortations to change behavior would be undermined by rational deviations. The point of this example is that, even when the better equilibrium is well understood, there still remains a nontrivial social problem of how to change everyone's expectations to the better equilibrium. Such coordinated social change requires some form of socially accepted leadership, and thus it may depend on factors that are essentially political.

(10) Plato's Republic (book 1) includes a definition of justice as giving each person what is due to him. In this sense, a shared social expectation of who should claim and who should defer in this game is indeed justice. If any shared cultural concept of justice suggests that 1 should claim and 2 should defer in this game, then the players should rationally play that equilibrium. Player 2 may regret this equilibrium, as she gets 0 in it, but the expectation of 1's just claim here should make 2 anticipate that her "unjustly" claiming here would reduce her own payoff to . Thus Schelling's focal-point effect enables us to understand how social concepts of justice can influence rational behavior, even when people are motivated only by their own self-interest, with no intrinsic desire to act justly. The behavior of selfish materialists can be decisively influenced by justice as a social concept that designates the focal equilibrium in such games of multiple equilibria. With such a multiple-equilibrium model of ownership, it is easy to see how the allocation of property rights can be influenced by symbolic rituals like a verbal promise over a handshake, as

these rituals can change the socially expected equilibrium of the claiming game.

With such a multiple-equilibrium model of ownership, it is easy to see how the allocation of property rights can be influenced by symbolic rituals like a verbal promise over a handshake, as these rituals can change the socially expected equilibrium of the claiming game. ... the word of a recognized authority or focal arbitrator can allocate valuable property rights without any enforcement mechanism other than people's desire to avoid costly conflict. ... The players can be coordinated in this way only if they have a shared perception of who has jurisdiction over their case and when his judgment is final.
(11) To focus attention on one equilibrium with no higher appeal, it would be best to consult the highest possible authority. If the players share a cultural understanding that certain unpredictable processes may be used by the fundamental divine spirit of the universe to answer questions, and that this divinity cannot be bothered about the same question more than once, then a recommendation that is based on such a sacred randomization can serve as a focal coordination device that cannot be appealed to any higher arbitrator. Then the oracle's recommendations can be self-enforcing, without any further intervention by the divine spirit, provided that the recommendations to the players form an equilibrium. Thus the focal-point effect can admit a socially significant role for

oracles and divination, as an effective foundation for social coordination.

Indeed, when we look for effective focal factors, what can command people's attention more than the overall pattern of the whole universe? This divine pattern can serve as a focal determinant, however, only when players have a shared understanding about it can be interpreted into a selection among the set of Nash equilibria of their game.

(12) rival-claimant games. Where property rights are unclear, people might gather in occasional assemblies to approve new rules for identifying which player should claim in more of these matches; from a Darwinian competition among cultures, we derive a general principle that

every successful society must have well-developed concepts of justice and authority that enable their members to identify efficient focal equilibria in most of the games that they commonly play.

DUSTIN: The rules of the game have changed and the old focal equilibria are efficient no longer. This idea is an economic basis for the need for a new world order to establish new focal equilibria which are efficient.
Such models offer a new perspective on the nature of politics and the state. We may see political leaders as general focal arbitrators for games throughout society where other cultural norms do not apply or require interpretation.

(13) Focal factors that bestow such coordination power on a leader may be called legitimacy (or charisma when they are intrinsic to the leader's personality). By the focal-point effect, the selection of legitimate leadership in any society can depend on its particular culture and history, such as a local tradition of identifying a particular family as royal.

... the same forces that help people to achieve consistent coordinated expectations in a successful society can become forces for inconsistency of expectations across societies in international relations.

Indeed, in international conflicts throughout history, people on each side have regularly failed to understand the other side's perception of justice in their conflict.
DUSTIN: Light speed communication is the rule-change that rendered the old focal equilibria obselete. The current solution is no longer stable. Light speed communication is fundamentally about diversity; suddenly, people of different experiences who don't undertand one another – don't share a common set of Schelling points – are smashed toegher. This fully explains the chaos of the modern age. The solution is a new global Schelling point – a New World Order.

(14) Game theorists regularly consider institutions as games, so that an institutional reform can be analyzed as a change in the rules of a game. But at a deeper level, we should also ask how such institutional games can be reformed or established in the first place. Having found focal coordination problems at the foundations of the state, we should recognize the essential role of Schelling's focal-point effect in such analysis.
To ask game-theoretically how an institution is established, we must consider the institution as a game that is embedded in a larger and more fundamental game, which Hurwicz (2008) calls the true game. ... To provide a framework in which different institutions could be established with different patterns of individual behavior, the larger true game must have multiple equilibria. Then an institutional reform and its induced changes in people's behavior can be understood in this framework as a change from one focal equilibrium to another. Indeed, without multiple equilibria, it would be difficult to understand how a

revolutionary change of national institutions can dramatically change so much

in a nation where the population and resources have not substantially changed in any material aspects.
(15) In Hurwicz's (2008) framework, establishing an institution means ruling out certain strategies that are feasible in the true game of life but are "illegal" under the rules of the institution. So given a normal-form game that describes the true game of life, an institution would be described by listing the nonempty set of strategies for each player that are legal in the institution. Then we may say that the institution's rules are rationally enforceable iff the utility- maximizing best responses for any player are always legal strategies whenever the other players are all expected to use legal strategies
DUSTIN: This explains the business cycle, and why businesses fail and are replaced by new businesses. This is also the key to power: identify that the rules are changing, and influence the new Schelling point, for it's rise will be inevitable as the old balance fails.

(19) Notice that the critical reputation here is how this nation is perceived by those other nations that it wants to deter, because it is their behavior that is supposed to change if the nation deviated from the deterrent strategy. Thus Schelling discovered the

paradoxical fact that an effective deterrent strategy requires coordination with the adversaries who are supposed to be deterred by it.

We are familiar with the need to coordinate with our allies in international conflict, but the importance of coordinating with our adversaries is less intuitive. Our strategy will not have the desired deterrent effect if it is not generally understood and recognized by our potential adversaries. Furthermore, we cannot be credibly held to a deterrent strategy unless our potential adversaries understand it in detail and can judge our correct implementation of it. If the terms of our deterrent strategy are vague or ambiguous, then in any specific case we would be tempted to deny our obligation to fulfill any costly promise or threat. Rational foundations for international law of war (jus ad bellum) can be derived from this basic argument that the strategic conditions for deterrent military responses need to be generally recognized and verifiable.
Of course a nation may have many different strategies which, if anticipated by others, could all have the same desired deterrent effect. Thus, the problem of sustaining a credible deterrent strategy is a problem of

negotiating a focal equilibrium in a dynamic game that has multiple equilibria,

where the other players include potential adversaries around the world.
DUSTIN: The current world order (Capitalism and Democracy) is just one negotiated focal point. And by negotiated I mean that it was forced upon the world by the USA in the post- World War II vaccuum of power.