Jacob Hornberger had an insightful blog post on Friday in which he applied basic game theory to the issue of sanctions. He didn't use the term "game theory," but he did the key thing that game theorists do: in thinking through various actions you might take to have an effect on B, ask yourself how you would respond to such actions if you were B. In other words, put yourself in the other person's shoes, not to get a touchy, feely, we're-all-in-this together Kumbaya moment, but to come up with your most-realistic analysis.
The Chinese government has threatened to impose sanctions on the United States if the U.S. government persists in its decision to sell weapons, including F-16s, to Taiwan. According to the New York Times, the threat was issued by a top Chinese military official, who did not specify what the sanctions would be. However, a possibility would be the wholesale dumping of U.S. government securities onto the international financial markets. Those instruments represent the enormous amounts of money that China has loaned the U.S. government to fund its enterprises in Iraq and Afghanistan.
Notwithstanding the U.S. government's steadfast insistence that its sanctions will induce Iranian government officials to submit to U.S. demands regarding its nuclear program, the U.S. government is steadfastly refusing to succumb to China's threat to impose sanctions on the United States.
Hornberger goes on to argue that if the U.S. government proudly ignores sanctions, why would Iran's government, whom no one has accused of having insufficient pride, act differently.
In a December 1996 talk I gave to a bunch of officials from the U.S. Department of Defense, I used such "put yourself in the other person's shoes" reasoning to explain how terrorists choose the countries to be terroristic against. Here's what happened next:
One person in the audience, noted game theory economist Martin Shubik, sarcastically accused me of advocating that "we all love one another." But he missed the point. A good game theorist puts himself in the shoes of the other person whether or not he loves him. Even if you hate your opponent, and especially if he hates you, it's good to know what motivates him and what pushes his button. Schelling would agree. Note that in the Schelling quote above, Schelling doesn't evince a lot of love for the burglar in his house: he just wants him to leave.