Games People Play: Game Theory in Life, Business, and Beyond

Recently, I completed Professor Scott P. Stevens’s 24-lecture course for The Great Courses © entitled Games People Play: Game Theory in Life, Business, and Beyond – Parts I & II. Though Professor Stevens is a Mathematician working at James Madison University, this course is taught under the Economics and Politics sections as these are the most frequent applications of game theory. Each of the 24 lectures is thirty minutes long for a total course time of 12 lecture hours. Professor Stevens presents this introduction to game theory as a survey course and often avoids complex mathematics (other than a few instances of basic calculus concepts) that is essential to the actual application of game theory to the problems discussed in the course.

Game theory has been a subject that crossed over into public fascination with the release of the Russell Crowe biopic film about Mathematician John Nash, a significant foundational game theorist. While Nash’s concepts were poorly described by the film’s writers, the significance of his contributions to the field was not. The beginnings of game theory start with another famous mathematician name John, this one the exceptional genius and polymath named von Neumann. He and an economist colleague, Oskar Morgenstern, wrote the modern masterpiece on the subject of games: Theory of Games and Economic Behavior published in 1944.

Professor Stevens defines game theory as “the study of strategic, interactive decision making among rational individuals.” “Any time,” he asserts, “people make decisions that affect others or in response to the actions—or even expected actions—of others, they’re playing a game.” Thus, ideas in game theory apply equally well to such mundane decisions as where to eat lunch as well as “earthshaking” decisions about the risk of nuclear war. Fundamentally, there are three components to any game: players, strategies, and payoffs. Throughout the first lecture, we learn that the concept of games applies to almost any facet of life. Professor Stevens presents various circumstances under which game theory can be applied in fields as diverse as the military, politics, biology, NASCAR, and business strategy.

To better understand games, the instructor presents a simple game. You are given $100 and a button that you can push. Another one hundred people are given the same and each of you is unknown to the other. If you or any of your competitors push your button every other player loses $2; if you lose money because others push their button, pushing your button will cut your losses in half. While it is rational for no one to press their button and take home the $100, studies show that most people will press the button. Another example of seemingly irrational behavior was demonstrated by Max Bazerman at Harvard Business School who taught Wall Street Investors to think ahead by auctioning off a $100 bill. The winning bid was $465.

Another classic example that applies to game theory is the Federal auction for licensing of the radio spectrum. Historically, the US tried many approaches to the sale of the radio spectrum that failed, in some cases miserably. Game theorists stepped in and created a multi-objective auction structure that successfully raised over $400 billion for the US Treasury in its first 5 years. This is one example of many, in which the application of game theory has shown to be advantageous in analyzing and approaching strategic decisions.

The basics of game theory are fairly simple to explain. Every game has three basic components: players, strategies, and payoffs. A player is a decision maker in the game. A strategy is a specification of a decision for each possible situation in which a player may find him or herself. A payoff is the reward or loss a player experiences when they follow their respective strategies.

Another distinction regards the type of game. For example, when all players may “move” simultaneously without knowing what the other player will do. Consider the simple childhood game, “Rock, Paper, Scissors”—this is a rather crude example of a simultaneous game. Sequential games are another variety. In a sequential game, one player moves first, giving other players some knowledge about their choice. A simple example of a sequential game is the familiar board game chess. A familiar term to many in the public is the “Zero Sum Game” which is also a type of game in game theory, although it is a bit different conceptually than what the common understanding might indicate. Zero sum games occur when all of the losses and all of the gains of all players are added up and equal zero. This is often evident before the game begins.

Other classes of games include: Constant Sum Games, Symmetric games, Perfect information games, Repeated games, Signaling games, Cheap talk games, Mechanism design, Bargaining problem games, Stochastic games, Large Poisson games, Nontransitive games, and Global games. Professor Stevens introduces many of these concepts (though not all of those listed) but only some are explored in-depth. To give my readers complete non-disclosure, these games can often be very complicated to understand but the instructor is very good at guiding one through the lecture. However, to truly understand these concepts, repeated listening and perhaps further reading might be necessary—they certainly would be for me!

The course expands upon these basics to examine more complex aspects of games such as strategies, threats, promises, brinkmanship, incomplete information, and chance. This array of factors in decision making, as presented in game theory, has applications in fields as diverse as climate change, voting, market entry, price setting, cooperative behavior and many more things that are beyond the scope of this review.

Without delving too deep into the topic, it might shed a little more light on the nature of the game theorist’s work by examining a few of the aforementioned complicating factors that inhabit even simple games. For example, strategies come in two varieties: pure and mixed. Pure strategies specify an action for every possible situation in the game. There is no random component to a pure strategy. Mixed strategies, however, does include some randomness as a probability is assigned to each pure strategy—and since probabilities are continuous there are an infinite number of mixed strategies available to the player. A variant of the mixed strategy is called the totally mixed strategy in which only positive values are assigned to every possible pure strategy.

The next concept we will examine is that of the threat. Professor Stevens explains that, in game theory, a threat is the equivalent of saying “Do what I want or I will make things worse for you than you would otherwise expect.” Promises, on the other hand, are the equivalent of saying, “If you make this choice, I will respond with a choice that you’ll like—something that you wouldn’t normally expect me to do.” Promises and threats are therefore, conditional.

Games of incomplete information are those in which not all of the players know the structure of the game—players might be uncertain about possible strategies or payoffs of other players. These require complex analysis and can have catastrophic consequences for some players. Finally, brinksmanship might best be illustrated by thinking about the Cold War—because this strategic element means to push dangerous events, such as the proliferation of nuclear arms, all the way to the “brink of disaster” (think about the Cuban Missile Crisis) in an attempt to achieve the most positive outcome in the game.

There are numerous topics in even a survey of game theory. A simple summary of such a survey is necessarily incomplete. However, I feel that I would be remiss if I did not include one of the most famous elements of game theory in my little muddled examination: the Nash Equilibrium. Professor Stevens explains that the way the movie A Beautiful Mind, starring Russell Crowe, explains the Nash Equilibrium is actually incorrect. The movie has Nash explain his equilibrium in terms of a dating conundrum among a bunch of competitive men. The solution the character in the movie comes up with is, unfortunately, not a Nash Equilibrium. So what is it? Well, first things first: what is an equilibrium in the game theoretic sense of the term?

An equilibrium implies some kind of balanced situation. In economics and other rational decision-making, equilibria are defined by their properties. British economist Huw Dixon as described three basic properties of equilibria: 1) Players’ behavior is consistent. 2) No player has any incentive to change their behavior. 3) Equilibrium is the stable outcome resulting within some dynamic process, i.e. the game under consideration.

The simplest explanation of a Nash Equilibrium is by example: John and Ted are in a Nash equilibrium if John is making the best decision he can, while also accounting for Ted's decision. At the same time, Ted is also making the best decision he can, while also accounting for John's decision. A definition of this concept is as follows: “[Nash’s] theory says that in non-cooperative games when there are two or more players, and each player knows what choices the other players face, there is a Nash Equilibrium if all players have chosen a strategy where they can't benefit by changing their strategy.” (from Nash Equilibrium in Economics)

One last important point is that Professor Steven’s lecture series is mostly conceptual and made for the intelligent layman. It ignores a lot of complicated mathematical proofs. To illustrate what I mean, here is an example of the mathematics involved in the proof of Nash’s Equilibrium. I tried to paste the mathematics, but the characters would not translate to the Blogger post, so please follow the link to the Wikipedia page just to see an example of how complicated the proof is for work like Nash's and why he deservedly received a Nobel for Economics for his work.

Likewise, there is a lot more complicated mathematics involved in computing the various probabilities in a decision matrix, finding the equilibria of various kinds in any non-cooperative game, and many other instances. This is fully disclosed by the instructor. Despite this, the Great Courses lecture series on Game Theory, Games People Play is fun, enlightening, and broadens the mind in the understanding of the complexity of decisions—particularly those facing our business and government leaders on a daily basis. While I was listening to it, I actually felt smarter! Then I began to try to summarize the material presented in the lecture series and felt the opposite effect! I will admit some might find it boring, but if you enjoy the topic of decision making or complex systems, or if you just enjoy an intellectual challenge, I can guarantee that you will benefit from at least a casual listen to this lecture series.
As always, happy learning! Work hard to get smarter every day. After all, that is what a learning life is all about!
I would love to hear any of your comments as always.

The World is Flat by Thomas L. Friedman

Just as I was finishing business school, three-time Pulitzer Prize winning New York Times columnist Thomas L. Friedman published the book The World is Flat.. This book seemed to be very popular among many of my graduating fellow MBAs, some of the professors, and a lot of people in the business community. I turned my back on the business world and put my MBA to use in public service management. I had also been working on an MA in Philosophy at a Thomistic Catholic College, so Friedman’s work was the last thing on my priority list at the time.

However, I recently ran across a copy of The World is Flat at a used book sale for fifty cents. I decided that it was time to take a look at Friedman’s book. There have certainly been a number of macroeconomic changes in the almost ten years since this book’s first publication (2005), most notably the housing bubble and the Great Recession begun in 2008.

Friedman’s theme is not hard figure out: the flat world is a metaphor for globalization “gone wild,” where a high school graduate in the United States competes for jobs not only with other Americans but also with hard-working Indians, Chinese, and other new global economic players. The author devotes page after page of anecdotes in support of this thesis. His second thesis is that to be competitive with foreign labor (physical, mental, and technological) the American worker must learn to be constantly evolving, using an almost paranoid sense of impending change as the driving force for “rebranding” themselves at roughly the same rate as the increase in computing power.

My main criticism with The World is Flat is that it seems desperately to want to be a book of social science. Unfortunately it is not. Therefore, when we put down the text we feel as though we have learned something about the proliferation of economic and cultural globalization—but we haven’t. What we have learned is Thomas L. Friedman’s opinion about these things based upon the anecdotal evidence he has collected in his own life.

This is not to say that Friedman’s theses are not correct, but I can offer only the support for them that Friedman offers in the text itself—which is very little. The World is Flat does have many redeeming qualities, however. It is well written with a unique voice. Friedman does manage to cram in a lot of little facts and figures (perhaps to make up for the lack of a proper scientific basis for support) which are interesting. Yet, by far the most interesting parts of the book are those that give a brief glimpse into the inner workings of corporations like Wal-Mart, Microsoft, Dell, and the company founded by all-around unique individual Ross Perot.

While there are some compelling aspects to the case Friedman makes with his “flat earth” metaphor, the book is too flawed to be of any serious use in guiding economic and public policy. Where it fails in its descriptive aspect (to provide any sort of scholarly research to support its main conclusions) it necessarily fails in its prescriptive methods.

I believe that if a journalist is going to undertake the type of project represented by the content of The World is Flat, he or she must work in collaboration with at least one social scientist. Much of the progress of the last 100 years has come about through the use of the scientific method to propose and then support or refute these proposals through a rigorous academic process. Without such standards, all we are left with is conjecture. It might be exquisite, well-written conjecture—but it is conjecture nonetheless.