GAME THEORY: The Pinnacle of Decision Making

plato in two of his texts the lashes and the symposium explains how socrates recalls an episode from the famous battle of dillion in 424 bc between the athenians and the boeseians the synopsis fish passage goes as follows consider a soldier at the front of the boating line having the following realization if our defense is successful i still risk the chance of dying if our defense is unsuccessful i will almost certainly die based on this reasoning it seems that the best alternative for the soldier is to run away regardless of who is going to win the

battle now imagine if all soldiers were to exhibit this very reasoning at the same time if such an event would occur they would all probably realize that they would be better off running away the seemingly simple yet incredibly reasonable hypothesis is one of the first historical instances of game theory flash forward 2 368 years in 1944 hungarian-american mathematician john von neumann published a book titled theory of games and economic behavior this foundational work contains the method for finding mutually consistent solutions for two-person zero-sum games this great book introduced game theory as a concept thus extending

its application to fields like economics politics and sports and leading to the expansion of the array of scientists that showed interest in it one of those scientists was the legendary john nash who won the nobel memorial prize in economic sciences in 1994 and popularized the idea of game theory as we know it today something very fundamental about game theory is that it doesn't get its name from the preconceived notion of game as we understand it a game in game theory is an interaction between multiple people in which each player's payoff is affected by the decisions

of others namely any single interaction you're part of can be analyzed with game theory in order to produce the most beneficial outcome but before we get into the mechanics let's lay out the main principles number one a game needs to include multiple players number two the players need to interact with each other number three there needs to be a reward number four we assume that players act rationally number five we assume that players act according to their personal self-interest prisoner's dilemma is the most widely mentioned game in game theory the basic premise is how to

establish a mutually beneficial strategy between two members of a gang that got arrested and face potentially imprisonment the rules are as follows number one the players of the game are prisoner a and prisoner b number two the players can't communicate with each other number three if a and b each betray each other each of them serves two years in prison number four if a betrays b but b remains silent a will be set free and b will serve three years in prison and vice versa and number five if a and b both remain silent both

of them will only serve one year in prison this matrix depicts the different choices of each member and signifies the number of years to serve according to each prisoner's dilemma exemplifies to a great degree the substrate of human nature the irrational self-interest-driven gang member will most probably choose to betray his counterpart thinking that he will get a better deal this idiosyncratic choice will most certainly lead to a disaster for both parties since they will get the worst deal possible the obvious mutually beneficial choice here is to keep silent the main idea behind this game is

to expose the inherent tendency of humans to display lack of cooperation in decent similar games game theorists usually coined the terms dominant strategy and nash equilibrium to distinguish the kind of strategies followed by the players those two terms are usually used together and form the basis upon which game theory is founded dominant strategy refers to strategies that are better than other strategies for one player no matter how the opponent may play those strategies might be great in the case of non-alternatives but if you're part of a game with more dominant strategies which means its player

has his own dominant strategy then they aren't optimal in the prisoner's dilemma case the dominant strategy for each player is to betray and here is where the term nas equilibrium comes into play the term is used since john nash explained the essentiality of equilibrium in his landmark work equilibrium points in n person games in essence what he proposed is that even high level competitive games like google vs apple or usa vs russia there exists an equilibrium where no side would benefit by changing its course at this equilibrium its side knows its adversary very well and

sticks to its strategy for instance in the prisoner's dilemma the nash equilibrium is the upper left square of the matrix which means both prisoners need to stay silent what makes nasa's theory of equilibrium so special is that it presupposes that in each game there is at least one point of equilibrium and all players will be better off trying to find it and form their strategy around it this momentous revelation help people in disciplines like politics war economics business and social theory understand the world better and form better strategies the inception of nash equilibrium was portrayed

exceptionally in the wonderful movie a beautiful mind gentlemen deep breaths yes you might want to stop shuffling your papers for five seconds i will not buy you gentlemen here oh we're not here for beer my friend oh does anyone else feel she should be moving in slow motion will she want a large wedding you think should we say swords gentlemen pistols at dawn have you remembered nothing recall the lessons of adam smith the father of modern economics in uh uh in competition individual ambition serves the common good exactly every man for himself gentlemen and those

who strike out are stuck with their friends i'm not gonna strike out you can lead a blonde in the water but you can't make a drink i don't think you said that all right nobody move she's looking over here she's looking at nash oh god all right he may have the upper hand now but wait until he opens his mouth [Music] adam smith needs revision what are you talking about we'll go for the blonde [Music] we block each other not a single one of us is going to get her so then we go for her

friends [Music] but they will all give us the cold shoulder because nobody likes to be second choice but what if no one goes for the blood we don't get in each other's way and we don't insult the other girls that's the only way we win [Music] that's the only way we all get laid even if people or companies rationally follow their own self-interest the best outcome is hard to reach when they can't or don't cooperate therefore the best strategy is to continually scan the market for potential alliances people who can forge strong alliances will eventually

become part of oligopolies and thus dominate their market the rest will consequently be ostracized that's what i love about game theory it approaches the game of life from its most axiomatic principle that of evolution evolution equals adaptation and therefore life is an omnipresent game of adaptation humans thrive in cooperation because it is the main strategy that helped us survive and thrive after years of adversity and struggle to compete against different forces of nature the sad thing is that after establishing our sovereignty we overpowered other species and in most occasions nature itself but eventually we turned

ourselves against each other there are a variety of factors that affect the descent to the point we have reached but a game theory mindset can work to our advantage i always believed that change and equilibrium start at the micro level and that is something we fail to grasp because we are usually consumed by events at the macro it is interesting to be in the know and discuss and argue about politics and national strategies but at the end of the day the trigger is pulled by the respective strategists what each of us could do instead is

to use game theory in our most challenging decisions in our closest relationships regardless of what decision you have made and how this will impact your future think like a game theorist ponder questions like are the actors in the situation rational are we able to reach nash equilibrium do they act according to their self-interest do they understand the rules of the game is their dominant strategy really that dominant if you see that most game theory parameters aren't met you know that you have to change your approach you either need to also act rationally which is something

i wouldn't suggest or you need to step away and find better players or games the choice is always yours life often times feels like a game and usually the winners are those who know how to play