Five Game Theory’s Concepts: Avoid Zero-Sum Games and Improve Your Life By Long-Term Thinking
“I use game theory to help myself understand conflict situations and opportunities” - Thomas Schelling
Game Theory is the study of strategically interdependent decision-making and optimal behavior in the event of a conflict of interest. Game Theory provides a lot of insightful concepts we can wrap in the theoretical framework that can be applied to various fields from diplomacy and evolution to business strategy, or even love.
The key pioneers of game theory were mathematician John von Neumann and economist Oskar Morgenstern.
They published the book "Theory of Economic Games and Behavior" which is considered a groundbreaking text that has created an interdisciplinary research field for game theory.
Neuman and Morgenstern were looking for a path towards developing the mathematics of life itself. The science of strategies and ways of improving the quality of life by making better decisions.
In my post, I want to present a broader picture of game theory that can be applied in everyday life under various circumstances. Here are five concepts from game theory that have a wide range of applications, and my examples of using them in different areas of my life.
1. Avoid zero-sum games
Zero-sum games are games where one side wins and the other loses an advantage. In other words, one player's gain is equal to the other's loss. We deal with zero-sum games wherever the interests of the players are exactly the opposite.
Zero-sum games are used to model situations of pure conflict in which there is no question of cooperation between players due to a clear conflict of interests.
We as human beings have many unhealthy biases and prejudices that we often fall into. One of them is a thought pattern in which we think that the best way to win is by the other loss. In other words, we don't see the benefit of winning by the other side.
It turns out that the best way to get long-term gains is through collaborations where both sides are winning, which is represented by one of the concepts in game theory called positive-sum games.
I stopped playing zero-sum games when I saw that they don’t lead to any clear benefits in the long term, they only exacerbate the conflict.
As humans, we have a lot of unhealthy tendencies, especially when it comes to zero-sum games. There are two common cases of playing zero-sum games. The first is playing on purpose and not seeing that there is no real benefit in doing so. The second is often to fall into cognitive bias and see the situation as zero-sum, even when it is not a case. This is known as the zero-sum bias.
The first case includes, for example, political debates, where your ego is involved in many ways and your only task is to show that you have right, and the second side is completely wrong. Very often, such debates do not even bring any logical arguments, and the only thing they care about is a struggle for social status.
The second unhealthy tendency is to fall into a cognitive bias towards seeing situations as zero-sum, even if they are not. This bias is a common cause of false judgments and poor decisions, unenabling cooperation, bringing mutual benefits.
2. Play long-term games with positive people
“Play long-term games with long-term people. All returns in life, whether in wealth, relationships, or knowledge come from the compound interest.” - Naval Ravikant
This principle has its foundation in game theory, but its application is much broader and brings great returns on investment. It's not about the money itself, although it seems like people who invest with a long-term perspective end up having more money than people with the opposite approach. But I want to focus on the bigger picture in terms of this principle.
Einstein once said that compound interest is the most powerful force in the universe. It turned out not to be proved that great physics wherever said it, but the idea behind compound interest and long-term games is a tailwind.
This principle is intertwined with others, however, if I had to choose the guiding principle that I follow in my life, be it from acquaintance to business, it is primarily long-term, which shows the commitment of both parties and requires a lot of work. Surrounding myself with positive people with whom I can build meaningful relationships is one of the best investments I made in my life.
Playing long-term games with positive people helps me develop holistically, it also works for both sides. Positiveness and long-term in terms of relationships, acquaintances are my primary focus. They are valuable relationships, free from status struggles and transformed by win-win situations.
There is no place to think of them as a zero-sum game, they rely on mutual and long-term benefits. And this reciprocal growth is one of the best feelings in the world. I have to admit that a lot of things I have and achieved I owe people. And I also hope that I have managed to contribute to their successes.
3. Principal-Agent Problem - align goals and desires
The Principal-Agent Problem is a concept that captures the notion of a conflict between desire and purpose. Benjamin Franklin is said to have said, "If you want it to be ready, go, if not send." I think this quote accurately reflects the essence of the principal-agent problem.
When you are the principal, you own a certain type of asset, but you can't manage them all on your own, some of them have to be delegated to others (agents). But hiring and posting is not a universal solution
The first distinction between an owner and an agent is that the first one works on their behalf, and the agent does not feel attached to the work they are doing.
The next problem that you may encounter is the fact that the agent wants to do the job differently, and then he may even do poor-quality work because he doesn't do it on his behalf.
As you can see, we are beginning to draw a problem because the principal and the agent are in opposing positions, have different expectations and goals, but what they have in common is the job they need to do together. So there remains the question of reducing disparities and emphasizing the joint work that binds them together, despite their different positions.
The way I avoid the Principal-Agent problem is by aligning goals and desires between two parties. I try to work with people with similar attitudes and approaches to risk management, how to operate, and so on.
But more importantly, I always try to make the other side feels more like the owner and the decisive part of the project. My goal is to make the other side feels less like an agent because the more you feel like the owner, the better the job you are supposed to do.
There is no better way to get started on a job than showing people how trustworthy they are and how important they are in your life or project.
4. Prisoner’s Dilemma
This is an example of a non-zero-sum game, which is a situation where the rewards and costs experienced by all players do not balance. It's different from zero-sum games, where If I won it implies your loss.
In Prisoner's Dilemma, one's gain doesn't necessarily mean your loss. Each player can gain by cheating on their opponent, but both will lose if both cheat.
This concept shows the importance of partnership, but also to some extent the inability of two rational people to work together under uncertain circumstances.
Prisoner’s Dilemma can be captured in the 2x2 matrix. We can imagine two players - A and B. They both have two choices: confess or remain silent. We have four situations:
A remains silent, B confess —> A goes to prison for 8 years, B for 1 year
A confess B remain silent —> A goes to prison for 1 year, B for 8 year
A confess and B confess —> both go to prison for 5 years
A remains silent and B remain silent —> both go to prison for 2 years
As we can see, the surest and safest choice is to keep both of them silent. They both only go to prison for two years, but there’s a catch. There’s is also a possibility that obscures their choice - going to prison for 1 year.
If people would able to trust each other and communicate clearly their choice would have been to remain silent. However, not knowing what the other side is doing, people tend to act out of self-interest.
And if we do this experiment only once, everything seems clear. Cheating is always the best solution, no matter what the opponent is doing. The cooperative player is a loser. The only reasonable option is to betray.
This is quite absurd situation, considering the fact that it causes both players to lose, in a situation where they could easily earn (by playing jointly and severally).
The Prisoner's Dilemma is another thought experiment that originated from game theory that covers various areas - military, advertising, business, and common resources.
A common example that we may be familiar with is the scenario of two countries caught in an arms race. Each of them has two options: either to increase armaments expenses or to sign an agreement to reduce them. Neither party can be sure that the other will abide by the terms of the agreement. As a result, the rational decision of any country is military development.
Prisoner’s Dilemma is the important component to understand the dynamics of a real-world situation based on cooperation and trust. It’s an extremely useful mental model, that shows how being selfish could potentially benefit us in the short them. But when everyone is act out of selfishness it causes great suffering for everyone.
This thought experiment shows how thinking about life as an iterative game can change our perspective and bring long-term benefits, rather than betting on a quick win.
5. The Red Queen Effect
“Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” - Lewis Carroll
In 1973, the biologist-evolutionist Leigh Van Valen of the University of Chicago, created the Red Queen hypothesis, in which he assumed that strong competition forced constant evolutionary changes of a directional nature.
As one of the examples, he gave the "arms race" between predators and their victims: predators are getting faster and more agile and better "armed" because their victims are faster and more efficient.
In other words: those species that are less plastic than their rivals are dying out.
Nowadays, the concept of the Red Queen is the meaning of the relativity of all progress, from evolution and biology to business, and even the military.
According to the Red Queen’s concept, nothing in life is static, it means we live in an ever-changing environment, and to gain continuity or reproductive advantage we need to constantly adapt, evolve or simply improve to be prepared for living in the dynamic world.
The paradox of the Red Queen is the fact that even for such a modest goal, which is to defend the current market position, the company must take more and more actions to prevent the success of its rivals.
Evolutionists say that life must constantly evolve to avoid extinction. Red Queen warns us to not be complacent. However, before you start the race, it would be wise to consider whether it would be better to run smarter rather than faster.
One of the tools used to boost growth is compounding, as we previously compared it to the powerful force, referring to Einstein’s quote. It may be more reasonable to find what’s given you the bigger leverage than strictly going into the field. In short, find your tailwind.
Slower, but wiser compounding will contribute to better development than the speed of iterations. Darwin found that some organisms are more adaptable than others. It can apply that you should not only consider the speed of iterations but wonder if the direction is right.
Think about the “Red Queen Effect” in terms of long-term leverage. What kind of actions give you the short-term spirit and long-term great returns. It is important to run faster to maintain relative position, but only under reasonable circumstances.
Red Queen Effect has applied in various amount of areas, for example, to stay relevant in the business and investments industry you need to compound more money over the years, to not lose the “arms race”. Warren Buffett said:
“But the promised benefits from these textile investments were illusory. Many of our competitors, both domestic and foreign, were stepping up to the same kind of expenditures and, once enough companies did so, their reduced costs became the baseline for reduced prices industrywide. Viewed individually, each company’s capital investment decision appeared cost-effective and rational; viewed collectively, the decisions neutralized each other and were irrational (just as happens when each person watching a parade decides he can see a little better if he stands on tiptoes). After each round of investment, all the players had more money in the game, and returns remained anemic.“
The technology enthusiast, Peter Thiel indirectly referred to the Red Queen Effect, describing the state of Microsoft as a company, which doesn’t innovate.
“You have to think of companies like Microsoft or Oracle or Hewlett-Packard as fundamentally bets against technology. They keep throwing off profits as long as nothing changes. Microsoft was a technology company in the ’80s and ’90s; in this decade you invest because you’re betting on the world not changing.”
Thiel also points out the state of current pharma companies as such that don't even try to run, let alone some kind of increased pace of the effort. In my opinion, that is why a significant part of society looks at them as unhealthy monopolies.
"Pharma companies are bets against innovation because they’re mostly just figuring out ways to extend the lifetime of patents and block small companies. All these companies that start as technological companies become antitechnological in character."
This quote is an interesting case, especially nowadays. A few days ago, famous entrepreneur Mark Cuban launched an online pharmacy with generic drugs at an affordable price. One of the significant examples is the Leukemia treatment imatinib, which has a retail price of $9,657 a month. Cuban’s pharmacy offers it just for $47 per month.
Could this mean that the Red Queen effect turns out to be true for giant tech companies? Overcoming the monopoly is an extremely difficult task, but looking at the current tendencies, it seems to be a matter of time.
Red Queen is an interesting case in terms of adaptation - more plastic species survive. It reminds me of Bruce’s Lee quote about being like water.
The water itself could be anything, what gives her power is the ability to adapt. it may be a glass, mug, pot, or kettle.
“Water has form and yet it has no form. It is the softest element on earth, yet it penetrates the hardest rock. It has no shape of its own, yet it can take any shape in which it is placed. In a cup, it becomes the shape of the cup. In a vase, it takes the shape of the vase and curls about the stems of flowers. Put it in a teapot, it becomes the teapot. Please observe the adaptability of water.”
To conclude, Red Queen reminds us that to stay relevant, we need to not only run faster but also develop the ability to adapt to changing circumstances, which means to seek out opportunities with the support of tailwind (compounding).
Summary:
Avoid playing zero-sum games that often are nothing but seeking social status.
The only games worth playing are long-term with positive people.
Principal-Agent Problem. Make the other side feel like a significant part of your project.
Thinking of life as an iterative game can shift your perspective from tendency-biased and "winning-oriented" at the moment to being focused on bringing great returns in the future.
“If you want to get somewhere else, you must run at least twice as fast as that!” - don’t forget about growth and innovation. Think about your tailwind, what brings the most returns. The ability to adapt is what makes you stay relevant.