– Whenever you interact with another person who has their own interests and tries to achieve their own ends, they try to do the best they can, given what they want; you try to do the best you can, given what you want, and therefore you interact in a strategic situation. “Game theory” is a mathematical theory that attempts to make sense of how people interact in these strategic situations.
– John von Neumann wrote a very important book called “Theory of Games” with a guy named Oskar Morgenstern. And in there, he expounded game theory. And game theory is: “The study of decision making under conditions of uncertainty over time.”
– It was originally developed in economics to try to understand economic behavior, such as why people buy certain things or why they are willing to work for certain wages. But later it was extended and applied to a variety of different situations, including biology, international relations, and even interpersonal relationships like friendship, parenthood, and family relationships. One of the things that game theory has really shown us, thanks to a recent study, is that the interactions that we often think of as “zero sums” or competitive, aren’t as competitive as they seem. . In situations like the Cold War, where most people thought it had to be a zero-sum game, we discovered that there were actually opportunities for mutual cooperation. Arms reduction treaties are an excellent example. The United States and the USSR realized that if they could find a way to cooperate, they could both save a lot of money and effort by reducing the number of weapons they had. Reagan and Gorbachev negotiated the START treaty with each other, and one of the big problems they had was, how can you be sure that while you’re eliminating nuclear weapons, your adversary is also eliminating nuclear weapons ? So rather than saying, “We’re just going to get rid of a big percentage of our nukes and hope the USSR does too,” they broke the interaction down into a bunch of little ones. Thus, the USSR would eliminate only a few nuclear weapons, and then the United States would eliminate only a few. They checked, then they went to the next step. And then each would eliminate a few more, and they would move on to the next stage. This process of taking a big interaction and breaking it down into small parts can turn a bad social dilemma into a positive interaction. What I do in my personal life and I think almost anyone can do in their personal life is try to think, “In this interaction, what outcome would be good for both parties?” And, ‘How can we achieve this result?’ And by thinking about everything that way, we often turn something like a situation where there has to be a winner and there has to be a loser, into a situation where no one feels like they’ve lost and everyone benefits.
– Game theory based on John von Neumann on a lighter version of poker.
– In any poker situation, you face a lot of uncertainty and it’s all about how to make the best decision at any given time – and that’s such a big part of life. All we’re trying to do, you know, ‘should we take this road or that one?’ ‘Should I go here on vacation or there?’ It’s about managing the uncertainties and probabilities of events – and poker is a very fun and easy way to teach someone how to do that. The first rule of thumb is how to extract the most money or chips from your opponent when you have a strong hand and how to lose the minimum when you have a weak hand. You will never know 100% where you stand: do you beat them or do you have a worse hand? So you kind of have to build a mathematically optimal strategy in each situation. The most damaging bias that can arise in poker, and I think very often in life as well, is the “sunk cost fallacy”. Where you’ll have a lot of chips, maybe almost your entire stack is in the middle, and yet you’re 85% to 90% sure you have the worst hand. Putting another chip in the pot probably isn’t a good idea, but we’ll often say to ourselves, “Ah, well, I’ve come this far. I’ve put in this much. The end.” But if you have very solid information that, from now on, putting more money in the pot is a bad idea, then you shouldn’t. But we have this belief that, “Well, I’ve put in so much time or so much effort, that we should keep going.” It can be very, very expensive. Once you start paying attention to the sunk cost fallacy, once it’s on your radar, you’ll probably notice at least a few things you wish you had done differently. These could be on a small scale. In my case, I’m now much more willing to give up on a book that I’ve realized I don’t enjoy and get no value from, rather than conscientiously skim through the rest of the book just because I’ve already come 100 pages. These changes could also be large scale. For example, I was in a doctorate. program and at some point I realized with increasing certainty that I was not happy in that area and that it would probably be best to change. And that the only reason I had stayed there for so long was because of my fear of facing the sunk cost of the four to five years I had spent preparing and working for the doctorate. And sometimes it really takes time to fully recognize that you have no good reason to stay on the job or on your PhD. or a project you’ve been working on for so long because sunk costs are a pain. But at least having the sunk cost fallacy on your radar means you at least have the ability to move past that and make the choice that will instead lead to better outcomes for your future.
– Game theory spent much of its early days analyzing zero-sum games, where one side will win and the other will lose, to try to determine which is the best strategy. What game theorists have realized is that in zero-sum games, the best strategy to follow when you’re up against a sophisticated opponent is to adopt the strategy that minimizes your maximum loss. This is sometimes called the “Minimax strategy”. So the idea is that you’re thinking, “What’s the worst-case scenario for me? What could my opponent do that would make me worse?” And then you’re like, “What’s the best strategy against that?” So you minimize your maximum loss. Game theorists have proven that if you use this way of thinking, by minimizing your maximum loss, you ensure that no matter how sophisticated your opponent is, you have protected yourself against the worst-case scenario. And not only that, but in zero-sum games, you did your best.
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