Leo Hidalgo

I love going to the movies. It really helps me to relax after a long day of teaching. This week, I went to see Murder on the Orient Express with my nephew, Paul. The movie, based on an Agatha Christie novel, tells the story of a murder committed on a stranded train. Hercule Poirot, the moustache-wearing Belgian master investigator, tries to unravel who did it. Paul said he loved the movie. I found it kind of off.

“I am not sure why, but I found the movie kind of off,” I said to Paul. “Of course, it has a star cast, including Penélope Cruz, Willem Dafoe, Johnny Depp, Judi Dench, and Michelle Pfeiffer. It’s not exactly boring. And the landscape is mesmerizing. But I don’t really see the need for all the visual splendor, and I also dislike the focus on Poirot’s moustache and his emotional temper.”

Paul sighed. “Are you getting old? I loved the movie! If this isn’t your cup of tea, what movies do you like? What’s your favorite movie?”

That was a no-brainer: “Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb.

This movie was right at the forefront of my mind because in my lecture earlier in the day I had shown a fragment to the students that nicely illustrates the value of commitment – the topic of the lecture. The movie is a black comedy from 1964. The Soviet Union has built a doomsday machine that will destroy all civilization if the Soviet Union is attacked. The doomsday machine is supposed to serve as a commitment device to prevent the US from attacking. However, when the American general Ripper decides to launch an unauthorized nuclear attack, the Soviet Union’s strategy goes tragically wrong.

Commitment is a central topic in economics. In many settings in which decision-makers interact strategically, they fail to reach favorable outcomes for themselves. Early entrants in a booming market see their initial profits marginalized once other firms enter as well. Workers slack because they do not expect their managers to pay a bonus at the end of the year even if they have the discretionary power to do so. Children continue begging for sweets because they know that their parents will give in if they whine for long enough. At a macro level, investors are hesitant to lend money to Greece because they fear that the European Central Bank will not bail out the country in the event of a credit crisis.

The key insight is that commitment to a strategy that is ex post unattractive might actually help decision-makers reach better outcomes. An early entrant opening an excessive number of retail shops prevents entry because it credibly commits to aggressive pricing once another firm enters the market. A manager encourages his employees to work harder by signing contracts with them according to which they will obtain a bonus if they perform well, even though the manager will rather keep the bonus at the end of the year. Children will behave if their parents throw away the sweets at home. And the European Central Bank can prevent a credit crisis by committing to bailing out governments when a crisis emerges.

The scene that I showed in my lecture takes place in the war room of the Pentagon. The Soviet ambassador, Alexei de Sadeski, reveals that the doomsday machine will be triggered automatically and that it cannot be disarmed. Then wheelchair-using Dr. Strangelove (whose character was modeled after the game theorist John von Neumann) comes to the fore. He explains why it is essential that the doomsday machine cannot be untriggered – yielding the necessary credible commitment for it to work. But, of course, a commitment strategy only works if the counterparty is aware of it. Dr. Strangelove: “The whole point of the doomsday machine is lost if you keep it a secret.” “Why didn’t you tell the world?” he asks the Soviet ambassador. The ambassador replies that they planned to do so a week later at the Communist Party conference, in honor of the Premier, “who loves surprises.”

“Why this particular movie?” Paul asked.

“It nicely illustrates the value of commitment.”

“Sorry, the value of what?”

I did not feel like repeating my lecture to Paul, so I quickly said: “Now that I come to think of it, I believe I liked Pulp Fiction even better.”