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1 The trailer
Combinations of desires, secrets and second-mover advantages trigger conflicts but also allow for conflict resolution. Many people have a desire for secrecy. Often the desire of secrecy is motivated by creating a second-mover advantage and by undercutting the second-mover advantage of others. This book will demonstrate that interaction of these three ingredients accounts for a large share of social problems and failures in politics and business but, somewhat paradoxically, can also help to overcome some of the problems that result from applying one or two of them in isolation. An adequate design of secrets can be a tool to circumvent second-mover advantages and to avoid or solve social conflicts. This observation was the point of departure, yet, also the conclusion of the Schumpeter Lectures which I gave at the University of Graz, November 7–12, 2013. The title of this series of four lectures was “The Good, the Bad, and the Ugly: From Ethics to Economics and Back Again.” Two of the four lectures were directly inspired by Sergio Leone’s 1966 masterpiece The Good, the Bad, and the Ugly. I showed sequences of the three-person duel, an icon of the history of movie making, and of the rather dramatic “sharing” of the treasure between the Good and the Ugly towards the end of the movie, both taken from a DVD version.1 In the other two lectures, I made some occasional remarks related to the movie in order to emphasize the coherence of the lecture project and the universality of the discussed topics, but also to prepare the audience for more direct references.
What looked like a simple exercise – writing down one’s lecture notes – turned out to be a rather complex project. As I cannot expect the reader to look at the film material, when reading the book, I had to rearrange the material of the lectures for this volume. On the other hand, the writing-down of the text allows a much more thorough discussion of the basic concepts analyzed here – i.e., desire, secrets, and second-mover advantage – which were fundamental for the movie, and are of eminent importance to social life, in general. In what follows, the movie serves as a point of reference and source of inspiration, but it is not pivotal for the generalization of the issues and results.2
As already noted in the Preface, this book does not presuppose that the reader knows the movie. However, if you detest Westerns, you will not enjoy reading parts of this book. Yet, there are enough pages without reference to Sergio Leone’s movie to keep the reader busy. Also, in the Preface I suggested that readers who find mathematics a nuisance should just flip the pages which show formulas or diagrams. They will not lose much. The other half of the readership, however, may profit from the more concise representation offered by using mathematical language. However, the level of mathematics offered here is very low from the technical point of view.
1.1 The confession
I have to confess that when I chose the title of my lecture series I was not aware how popular Sergio Leone’s film was and still is. Probably this is partly so because of its German title Zwei glorreiche Halunken. This is not a very attractive title and a rather unfortunate translation. An English equivalent would be “Two Glorious Scoundrels.” Before the shooting began, the working title of the movie was I due magnifici straccioni which comes close to “The Two Magnificent Tramps.” Obviously, the working title and Zwei glorreiche Halunken select Blondie and Tuco, i.e., the Good and the Ugly. However, in the last pictures of the movie, Tuco does not look glorious with a hangman’s noose around his neck balancing on the wooden cross of a tomb, not to lose control and get his neck broken or his throat sealed forever. Moreover, calling the two scoundrels is a euphemism, given the number of corpses they produced and the sadistic tortures they occasionally exercised on each other and others. And why “Zwei” (i.e. two)? What happened to the Bad, called Angel Eyes, who played such an important role in bringing the story to its end? It needs three for the three-person duel which is perhaps the most outstanding scene of the movie. Given the misleading and unattractive German title, it is not surprising that when I was young this movie was not as popular in Germany as it was in the Anglo-Saxon world. For quite some time I did not even relate Zwei glorreiche Halunken to The Good, the Bad, and the Ugly.
Over the years, the three-person duel, also called “truel,” became a major device to illustrate the problem of strategic interaction. I was told that this sequence of Sergio Leone’s movie was used in many game-theory courses and it also found its way into leading journals of this field (see Kahn and Mookherjee’s (1992) “The Good, the Bad, and the Ugly: Coalition Proof Equilibrium in Infinite Games,” published in Games and Economic Behavior). However, earlier I read Marc Kilgour’s analysis of the truel (Kilgour 1972, 1975, 1978) without relating it to Sergio Leone’s The Good, the Bad, and the Ugly, “GBU” in what follows.
My interest in GBU grew after I had watched A Fistful of Dollars (1964) – Sergio Leone’s first film of the so-called “Dollars Trilogy” – in the guest apartment of the Indira Ghandi Institute of Development Research in Mumbai where I spent two weeks in September 2004 teaching Law & Economics to Ph.D. students and guests. (The second movie of the “Dollars Trilogy” is For a Few Dollars More (1965), and GBU (1966) completed the trilogy.) When watching A Fistful of Dollars, there was the noise of a fan in my living room. I felt very hot watching the movie, although the thermometer indicated that the room temperature wasn’t excessive. I remember that the next day I discussed some episodes of the movie during lunch and in class. I do not remember their names, but I would like to thank my sparring partners and send apologies for exploiting them. These thanks go to many people around the globe, not just in India.
Finally, about seven years ago, my son gave me a DVD of GBU for Christmas. I watched the movie three or four times in full length before I started to prepare my Schumpeter Lectures at Graz. As I tried to document it in the subtitle of my lectures, I found much more in this movie then the notorious truel. Still, the truel is an outstanding scene and it triggered my interest from a game-theoretical point of view. Its overwhelming theatrical impact derives from the assumption that there is a second-mover advantage – and therefore there is no rational justification for a first action, i.e., for action at all. As a spectator, I was pushed into a choice situation that does not allow me to form helpful expectations and to suggest rational actions. Again and again, when watching this scenario, I get a feeling of forlornness and desperation, and I find this feeling mirrored in the eyes and fingers of the three duellers.
There seems to be no solution to this situation – neither for the duelers nor for the spectators. Obviously, Sergio Leone enjoys the hopelessness embedded in the intractability of the decision problem – every minute the duelers watch each other and the audience watches them – perhaps in order to demonstrate how smart his own resolution is. I have to confess that I found his solution somewhat disappointing. Nevertheless, it offers food for thought. Some of it entered the agenda of this book. I hope that the book demonstrates that the issue captured by Sergio Leone’s truel is far more general than GBU suggests. The analysis of the truel will be a major item on the agenda of this book.
1.2 The agenda
Interestingly, Kilgour and Brams (1997) do not cite GBU, even when they give examples of truels referring to movies and competing television networks. Perhaps this is the case as in Sergio Leone’s truel, the probability of each player hitting the chosen target does not matter, while it is an important issue in Kilgour (1972, 1975, 1978) and Kilgour and Brams (1997). The immense excitement and tension of the situation in GBU is the result of the expectation that if A shoots B, then C has time enough to shoot A. If so, then there is an obvious disadvantage for the one who shoots first, i.e., there is an advantage for the second-mover. However, it is not obvious who will be the second-mover. Will there be a second-mover at all?
If there is a second-mover advantage, then a likely outcome is that nothing at all will happen as there will be no first-mover, i.e., the second-mover advantage implies a first-mover dilemma. This is a rather general phenomenon, as the discussion will reveal. We expect an underprovision or underperformance in cases of second-mover advantages. The sequence of moves – i.e., time in its strategic form – matters. Of course, time could also matter if the environment changes and, with it, the decision situation. However, in Chapter 3 of this volume we will focus on the strategic aspect of time or, more generally, time defined by history. It is neither the time measured by the clock on the wall nor the one captured by the calendar. It is defined by events and decisions. The sequence of decisions and events determines the information of the decision makers and reshapes the decision situation and thereby the possible outcome. This is essential to many game situations in which “historical time” boils down to strategic time, and a second-mover advantage can be one of its implications. Another implication is information: “historical time,” i.e., the data of past events, defines what decision makers could know and incorporate in their decisions.
As historical time is bound to events and decisions, a look into the future is identical with forecasting events. It is not enough to follow a horizontal time axis to count hours, days, weeks, months, and years when we talk about the future.
Historical time and, more specifically, strategic time seem to be decisive for the GBU truel. There are numerous examples also in the world of politics, production and trade that demonstrate its effect. For an illustration of the latter, we will take a look into the history of diapers, video recorders and “lite” beer, and comment on hedge-fund managers who made up to $2.2 billion a year.
When it comes to underprovision or underperformance, then the potential of an exogenous agency, the government, could be a solution. In her study, The Entrepreneurial State, Mariana Mazzucato (2014) gives a long list of examples which demonstrate that outstanding success of private businesses often results from government activities (i.e., public investments), overcoming the disadvantages of a first-mover. Apple and Google are just two of them that we will discuss in what follows – perhaps the most popular ones. These cases indicate that information often is an essential spin-off of public investment, ready for private use. On the other hand, government might also try to reduce information if it prefers underprovision or underperformance, or if it does not want to accept responsibility for such failures. In extreme, but not so rare cases, it chooses a policy of obfuscation and authorizes secret agencies for implementing such a policy. Whenever information matters, secrets and the creation of secrets have a strong impact on decision making. This book contains some nice examples that we will discuss in Chapter 4, e.g., the Zimmermann Telegram (a major event of World War I), George Orwell and his notebook, and the CIA’s cultural policy. The latter two are byproducts of the Cold War in the aftermath of World War II.
The truel in GBU could be a perfect illustration of how a secret could map a second-mover advantage into a first-mover advantage. Blondie knew that Tuco’s gun did not have any bullets. He had made a first-move in this truel by unloading Tuco’s gun the night before the truel. Therefore, when he is dueling with Angel Eyes, he had the advantage that Angel Eyes did not know about Tuco’s incapacity. Perhaps Sergio Leone was not aware of the strategic impact of this modification as he made Angel Eyes draw first, but with no success: Blondie was much faster in drawing and shooting. One might argue that Blondie was faster as he knew that Tuco was no danger to him while Angel Eyes, who did not have this information, was handicapped in his attention and the speed of his operation. This assumption could save the rationale of the outcome, but somehow devaluates the decision problem of the truelists.
Before discussing the strategic implications of time (i.e., second-mover advantages and their consequences) and the implications and creation of secrets, Chapter 2 of this volume will introduce desires as the driving force. If there are no desires, then second-mover advantages and secrets are “vacuous experiences,” and individual and social decision making miss their point of reference. Obviously, the heroes of GBU – Blondie, Angel Eyes and Tuco – have very strong desires, especially when it comes to money. The greed for money is the dominating motivation for most of what we see on the screen. There is also some lust for killing and torture, but lust seems to be secondary, and the sexual dimension of it is marginal, even missing: their focus is on money and how to get it. There is no alternative that competes with the desire for money. However, the last scene of the movie suggests a second thought.
Of course, a movie is not real life. Kaplan and Rouh (2013: 40) observe that the average pay (in 2010 dollars) for the twenty-five highest-paid hedge fund managers climbed from $134 million in 2002 to an astonishing $537 million in 2012. I presume that these twenty-five people have other desires than just the one for making money, but I think making money is of utmost importance to them. Otherwise, it is even more difficult to understand what they do and what they earn, than it already is.
Given this, it seems amazing that we do not find references to desire in modern economics textbooks. Greed is absent, too. How do people decide and why? Standard economics models individual decision making with the assumption that individuals have preferences over given alternatives and they pick the alternative that they appreciate most, given various constraints like, ...
