Fortune 500, Meet Daytona 500

What NASCAR can teach us about business.

The winner: Michael Waltrip

When Michael Waltrip feinted briefly, sped in close behind another car, and then whipped past Jimmie Johnson to win the rain-shortened Daytona 500 on Sunday, the crowds surrounding the track, screaming through mouthfuls of $7 chili dogs and a sea of Confederate flags, cheered with wild glee. The Excitement! The Noise! The Complexity Theory!

So an economics professor goes to the Daytona 500 … It sounds like the beginning of a bad joke. But for game theorists, stock car racing is emerging as an unlikely laboratory for understanding the world. A 2002 Rand Corp. paper titled “Social Science at 190 MPH on NASCAR’s Biggest Superspeedways” suggests that NASCAR should interest academics because it offers an opportunity to study a complexity rarely seen in other sports but much evident in the real world: the tension between cooperation and competition that is necessary for modern victory.

The NASCAR laboratory is a product of simple physics. Unlike other sports, which are largely determined by individual athletic ability or team strength, NASCAR requires its competitors to cooperate in order to win. The forced cooperation is a product of two factors. First, NASCAR imposes engineering restrictions that prevent any driver from attaining a major equipment advantage over rivals. And second, “drafting” allows cooperating cars to go faster. In the 1960s, drivers discovered that if one stock car closely follows another, drafting in its wake, both cars increase speed. The lead car benefits from a drop in air resistance that comes when the slight vacuum at its rear wheels is filled. And the second car speeds up because it’s partially protected from the wind. The more cars that are lined up, the faster each car goes. Hence the monotonous rows that develop around the oval track at Daytona.

Drafting raises all sorts of delightful game theory possibilities. As long as two racers stay in a partnership, they can catch up with or pass other cars that are not drafting. Partnering doesn’t bring home the trophy, though. To win, a racer must defect and pass his opponents, but as David Ronfeldt, the author of the Rand paper explains, when “a racer in a line wants to break out and get ahead he needs at least one partner. If he swings out alone, he is bound to lose momentum” and lose the race, leading to the NASCAR axiom that “it takes two to pass one.” So, cars engage in a delicate dance of game theory and false allegiances, forming partnerships at 190 mph to overtake the leader until a betrayal or defection leaves one car falling back while the other partners with a new rival.

The gamesmanship gets even more complicated. When two cars begin drafting, the second driver gains an advantage if he (and all NASCAR drivers are “he”) drops back a length or two and then re-enters the draft zone and uses the tiny extra momentum to slingshot past the leader. Additionally, following cars can “fan the tail” of the leader, moving their bumper within inches of the lead car and fanning back and forth to disrupt the airflow over the vehicle. As the aerodynamics scatter, the lead car loses downward grip, and the driver must slacken acceleration to avoid sliding sideways. So lead drivers will slow when they see followers begin to fall back or “mirror” the drivers behind them to prevent attacks.

This tension between cooperation and competition is precisely where Ronfeldt sees applicability to the real world, because it turns out that similar dynamics exist all around us. When Microsoft and Cisco developed partnerships during the ‘90s with potential competitors such as Intel, Compaq, and Dell, they formed “drafting lines” that weathered the booms and busts that damaged lone drivers like Apple. Sen. Trent Lott’s fall from grace and Sen. Bill Frist’s ascendance can be explained in part by a series of defections of potential rivals from Lott to Frist that, once started, built a momentum that became impossible for Lott to slow. At the core of these events is a tenet of the emerging science of complexity: Cooperation can sustain a surprisingly high degree of competition, as long as the participants agree to some basic rules.

But why do some partnerships work while others end in disarray? Again, NASCAR teaches lessons. Frist and Microsoft attract drafting partners for the same reason that Dale “The Intimidator” Earnhardt won races: They have enough “social capital” to convince competitors they will honor their partnership contracts, even if just for a while. In NASCAR, some of this social capital is achieved through agreements struck prior to a race or by radio communication during competition. (NASCAR’s utility as a laboratory is enhanced by our ability to retroactively review communications and compare them to tapes of the race.) But more frequently it is a product of the NASCAR ethic of Hard but Fair. “I’ll race clean because I know the rules,” one driver explained. “But if you get too greedy, it’s payback time.” Put another way, even though we may be rivals in the future, we’ll agree to trust each other right now.

NASCAR also serves as an interesting model for what causes certain kinds of aggressive behavior. Economists at the University of Chicago made a surprising discovery when they began examining NASCAR accidents. While they initially assumed that aggressive driving and the attendant crashes occur when racers are eager to pass cars in front of them, it turns out the opposite is true. Drivers are more likely to crash when someone is about to overtake them. In other words, racers become more aggressive not when they think they can win, but when they’re afraid they’re going to lose.

And so does everyone else. Research suggests that investment bankers are more prone to commit fraud when they feel the competitor at their heels. Students in school cheat not to get the “A,” but to avoid the “C.” From Indonesian cockfighting to technological change, recklessness stems more from the fear of falling than the excitement of new heights. “Don’t be greedy” is how Cisco’s CEO explains his strategy for transforming competitors into docile partners. The cooperation of NASCAR, or any other system it turns out, persists only when everyone believes he has the opportunity to win.

These implications may be significant. America stands at an interesting crossroads: The drafting lines that developed in the wake of the Gulf War have fractured. Our social capital in the global arena, which carried us through much of the last decade, may be on the wane. Last year, when President Bush invited Tony Stewart, the 2002 NASCAR Winston Cup champion, to the White House, some cynics suggested he was pandering for Southern votes. But maybe the president was just looking for a few tips.