Hey all -
This newsletter will cover some major concepts in game theory. First of all, what is a game?
Let’s take soccer. There are the players, there are the rules of the game, and there are rankings - often winners and losers. Soccer features both cooperation among teammates, as well as competition between opponents. And of course, there is strategy: you have to plan ahead, taking into account what the other side is thinking (including what they think you’re thinking).
So maybe a better question is: what’s not a game? Is getting a job a game? Or getting a promotion? How about getting a date? Or selling a product?
In each of these, knowing the rules - or what you can or can’t do - is quite important. These are also social enterprises - you can’t play alone. There’s strategy: you have to plan ahead and think about what other people are thinking. And certainly, there are winners and losers.
Naturally, some very smart people have applied the theory of games to the real world, from business strategy to job hunting to foreign policy.
What can game theory teach us about decision-making and human behavior in a social context? Let’s find out.
* Single-shot vs. repeated games
One very important feature of games is how long they are.
If the games are short - the most extreme of which is a “single-shot” game - people have an incentive to cheat. As a tourist in a new city, the businesses you visit know they’ll never see you again, so they don’t really care about your repeat-business. And since they know you won’t come back anyway, they have an incentive to focus on marketing for more customers, rather than improving the quality of their product.
Obviously this is a problem. We want to businesses to care about the quality of their products. How do we do that?
Make the game longer. Have multiple interactions. Play a “repeated game.”
If a business has a reputation that carries across time - for example a Yelp page or TripAdvisor profile - then they can’t cheat people in the short-term. The long-term matters.
Reputation does not exist in the short-term, but in the long-term, it conveys information about how people behaved in the past. And the longer the track record, the better we can guess how they will behave in the future. Here we get predictability, reliability, and trust.
Trust is earned over time. And once you earn it, you want to keep it - to “keep your reputation.” Without this little thing called reputation, we cannot trust one another.
We want to encourage long-term thinking and long-term games. And from the reputations that emerge, we are able to trust and cooperate.
* Zero-sum vs. non-zero-sum games
Sometimes, we can all be winners. If I really want that jacket you’re selling, and you really want my money - and then we trade - we just created value out of thin air. Because we both won in this transaction - you got a +1 and I got a +1 - we say this is a “non-zero-sum game.”
Not all games are like this. If there are 5 chocolates sitting on the table, and I eat all 5 of them, you are eating zero chocolates. I win, you lose. This is a “zero-sum game.”
Zero-sum games tend to be constrained by the real, physical world. Physical resources on the planet are limited - so when some people get them, other people do not. Because there are winners and losers here, zero-sum games are competitive.
But non-zero-sum games tend to be bounded only by our imagination and preferences, detached from the real world. If I can make you happier while making me happier at the same time, we just created something from nothing. In these games, it makes sense to be cooperative.
We want to play non-zero-sum games because we can all be winners. We can grow the pie if we work together.
But if we get stuck with a zero-sum game, we must fight over the existing pie. Not a fun game.
So what do you do if life gives you a zero-sum pie?
I’ll answer that in a second.
First I want to point out something interesting. Notice how I’ve described properties of the games themselves, not the actors in them. If you get dealt a single-shot game, or a zero-sum game, you don’t really matter.
The game matters. Not you.
In other words, sometimes life hands you a bad game and it doesn’t matter how nice or clever or hardworking or ambitious you are. The game is stacked against you. Circumstances will drive outcomes, not you.
But! If some games are stacked against you, just maybe some games are stacked for you. And while you may not be able to overcome the circumstances of any one game, you may be able to choose the game you’re playing.
If you have that option - which admittedly is not always - you want to choose wisely.
If life gives you a zero-sum pie, look for a new pie. Look for long-term, non-zero-sum games.
Thanks for reading,
Alex