3 game theory tactics, explained

Summary

This video explores game theory, a mathematical framework for understanding strategic interactions where individuals pursue their own interests. Originating in economics, it has since expanded to fields like biology and international relations. Key concepts discussed include the Minimax strategy, mutual cooperation in seemingly zero-sum situations like the Cold War, and practical applications such as recognizing the sunk cost fallacy in poker and life decisions. Emphasizing decision-making under uncertainty, the video highlights how game theory can transform competitive interactions into mutually beneficial outcomes.

Takeaways

• 🤝 Game theory is a mathematical theory that helps understand strategic interactions between individuals with differing interests.
• 📚 John von Neumann and Oskar Morgenstern laid the foundation for game theory in their book 'Theory of Games', focusing on decision-making under uncertainty.
• 🛍️ Originally developed in economics, game theory has expanded to various fields, including biology, international relations, and interpersonal relationships.
• 🔄 Game theory has shown that interactions often perceived as zero-sum or competitive can have opportunities for mutual cooperation, as seen in arms reduction treaties during the Cold War.
• 🔄 The START Treaty between the U.S. and the USSR exemplifies how breaking down a large interaction into smaller parts can transform a negative social dilemma into a positive one.
• 🤔 Personal application of game theory involves seeking outcomes beneficial for all parties involved and strategizing to achieve such outcomes.
• 🃏 Game theory is based on simplified versions of poker, teaching decision-making in uncertain situations and the importance of probabilities.
• 💰 In poker, the first rule is to maximize gains when you have a strong hand and minimize losses when you have a weak hand.
• 💡 The 'Sunk cost fallacy' is a common bias in both poker and life, where individuals continue investing in a losing endeavor due to the time or resources already spent.
• 🚫 Recognizing the sunk cost fallacy can lead to abandoning unproductive activities, such as finishing a book that isn't enjoyable or leaving a Ph.D. program that isn't fulfilling.
• 🎯 The 'Minimax strategy' in zero-sum games advises players to minimize their maximum loss, ensuring protection against the worst-case scenario regardless of the opponent's sophistication.

Q & A

What is game theory and why is it significant?

Game theory is a mathematical theory that helps understand how people interact in strategic situations where each party has their own interests and goals. It's significant because it provides insights into decision-making under uncertainty and has applications in economics, biology, international relations, and interpersonal relationships.

Who are the authors of the book 'Theory of Games' and what is its contribution to game theory?

John von Neumann and Oskar Morgenstern are the authors of the book 'Theory of Games'. It laid the foundation for game theory by studying decision-making under conditions of uncertainty over time.

How has game theory expanded beyond its original field of economics?

Game theory has expanded to various fields, including biology, international relations, and interpersonal relationships like friendship, parenting, and family dynamics, providing a framework to analyze strategic interactions beyond economic behavior.

What is a 'zero-sum' game and how has game theory challenged the perception of such games?

A 'zero-sum' game is one where one party's gain is exactly balanced by another party's loss. Game theory has shown that interactions often perceived as zero-sum can have opportunities for mutual cooperation, as seen in arms reduction treaties during the Cold War.

Can you provide an example of how game theory was applied in international relations?

An example is the START Treaty negotiated between Reagan and Gorbachev, where both the U.S. and the USSR found mutual benefits in reducing their nuclear arsenals, demonstrating that cooperation can be achieved even in seemingly competitive situations.

How can breaking down a large interaction into smaller parts change a social dilemma?

Breaking down a large interaction into smaller parts can transform a social dilemma into a positive interaction by allowing each party to verify the other's actions and build trust incrementally, as illustrated by the step-by-step approach in arms reduction treaties.

What is the 'Sunk cost fallacy' and how does it affect decision-making in poker and life?

The 'Sunk cost fallacy' is the tendency to continue investing in a decision based on the amount already invested, rather than evaluating the current and future value of the decision. It can lead to poor choices in poker by continuing to play with a weak hand and in life by sticking with unproductive endeavors.

How can recognizing the 'Sunk cost fallacy' help in personal life?

Recognizing the 'Sunk cost fallacy' can help individuals make better decisions by allowing them to abandon unenjoyable or unproductive activities without feeling the need to justify the time or effort already invested.

What is the 'Minimax strategy' in game theory and why is it effective?

The 'Minimax strategy' is a tactic used in zero-sum games where a player aims to minimize their maximum possible loss. It's effective because it guards against the worst-case scenario and ensures the best possible outcome against a sophisticated opponent.

How does game theory relate to everyday decision-making involving uncertainty and probabilities?

Game theory relates to everyday decision-making by providing a framework to evaluate choices under uncertainty and to calculate the probabilities of different outcomes, similar to making decisions in poker where uncertainty is inherent.

What is the connection between poker and game theory as described in the script?

Poker is used as an analogy for game theory because it involves making decisions with incomplete information and uncertain outcomes. The strategies used in poker, such as maximizing gains with strong hands and minimizing losses with weak hands, are reflective of broader game theory principles.

Outlines

00:00

📚 Strategic Interactions and Game Theory

The first paragraph introduces the concept of game theory as a mathematical framework for understanding strategic interactions between individuals with differing interests. It highlights the seminal work of John von Neumann and Oskar Morgenstern in establishing game theory as a field of study. The paragraph explains that game theory originated in economics but has since been applied to various disciplines, including biology and international relations. It also discusses how game theory challenges the notion of 'zero-sum' games, using the Cold War and arms reduction treaties as examples of competitive situations that allowed for mutual cooperation. The paragraph concludes with the idea of breaking down large interactions into smaller parts to transform negative social dilemmas into positive interactions, and the application of game theory principles in everyday life, including the avoidance of the 'Sunk cost fallacy'.

05:02

🃏 Poker, Decision-Making, and the Sunk Cost Fallacy

The second paragraph delves into the application of game theory to the game of poker, illustrating how it serves as a metaphor for life's uncertainties and the importance of making optimal decisions. It emphasizes the first rule of poker, which involves maximizing gains when holding a strong hand and minimizing losses with a weak hand. The paragraph also addresses the psychological challenge of overcoming the 'Sunk cost fallacy,' a cognitive bias where individuals continue an unproductive course of action due to the investment of resources, time, or effort, even when it's no longer beneficial. The speaker shares personal anecdotes about abandoning unenjoyable books and the larger-scale decision to leave a Ph.D. program, recognizing the sunk costs involved and the importance of making future-oriented decisions. The paragraph concludes with a brief mention of the 'Minimax strategy' in zero-sum games, a strategy that minimizes the maximum potential loss.

Keywords

💡Game Theory

Game Theory is a branch of mathematics that studies strategic interactions among rational decision-makers. It is central to the video's theme, which discusses how individuals interact in strategic situations. The script mentions John von Neumann's foundational work in this field, emphasizing its application beyond economics to various fields such as biology and international relations.

💡Strategic Situations

Strategic situations refer to scenarios where individuals or entities interact with each other, each pursuing their own interests. The video script uses this concept to describe the basis of game theory, highlighting how individuals make decisions in the context of others' actions and reactions.

💡Uncertainty

Uncertainty in the video script refers to the unpredictable or unknown elements in decision-making. It is a key aspect of game theory, as it deals with decision-making under conditions where outcomes are not fully known or controllable, as illustrated by the application of game theory in economics and international relations.

💡Zero-Sum Game

A zero-sum game is a concept where one party's gain is exactly balanced by another party's loss, implying a competitive environment. The script challenges this notion, showing that even in situations like the Cold War, perceived as zero-sum, there were opportunities for mutual cooperation and non-zero-sum outcomes.

💡Cooperation

Cooperation is a key theme in the video, especially in the context of game theory, where it is traditionally associated with non-competitive outcomes. The script discusses arms reduction treaties as examples of turning a zero-sum situation into one of mutual benefit, illustrating the shift from competition to collaboration.

💡START Treaty

The START Treaty, mentioned in the script, is an example of applying game theory principles in international relations. It was a series of arms control agreements between the U.S. and the USSR, demonstrating how the two superpowers could break down a large interaction into smaller, cooperative steps to achieve mutual disarmament.

💡Sunk Cost Fallacy

The Sunk Cost Fallacy is a cognitive bias where individuals continue an action based on the cumulative prior investment (' sunk cost'), rather than evaluating the current and future value of other options. The script uses poker as an analogy to explain this concept and also relates it to life decisions, such as abandoning a Ph.D. program when it's clear it's not the right path.

💡Poker

Poker is used in the script as a metaphor for decision-making under uncertainty. It illustrates the principles of game theory, such as extracting value when in a strong position and minimizing losses when in a weak position. The script also uses poker to discuss the sunk cost fallacy and the importance of making decisions based on current and future probabilities, not past investments.

💡Minimax Strategy

The Minimax Strategy is a concept in game theory where a player aims to minimize their maximum possible loss. The script explains this as a strategy for zero-sum games, ensuring protection against the worst-case scenario regardless of the opponent's sophistication.

💡Decision-Making

Decision-making is a fundamental aspect of the video's narrative, particularly in the context of game theory. It involves choosing the best course of action among alternatives, often in the face of uncertainty. The script discusses how game theory provides frameworks for making optimal decisions in various strategic situations.

Highlights

Game theory is a mathematical theory that helps understand how people interact in strategic situations.

John von Neumann and Oskar Morgenstern developed game theory in their book 'Theory of Games'.

Game theory originated in economics but expanded to various fields including biology and international relations.

Game theory shows that interactions often perceived as zero-sum can have opportunities for mutual cooperation.

The Cold War is an example where mutual cooperation was found despite the competitive nature.

Arms reduction treaties demonstrate how cooperation can lead to significant savings for both parties.

The START Treaty between the U.S. and the USSR is a practical example of breaking down interactions into smaller parts for mutual benefit.

Transforming a competitive situation into a cooperative one can lead to outcomes where no one feels like a loser.

John von Neumann used a simplified version of poker to illustrate the principles of game theory.

Poker is an effective tool for teaching decision-making under uncertainty and probabilities.

The first rule in poker is to maximize gains when you have a strong hand and minimize losses when you have a weak hand.

The 'Sunk cost fallacy' is a common bias in both poker and life that can lead to costly decisions.

Recognizing the sunk cost fallacy can help in making better choices, such as abandoning a book that is no longer enjoyable.

The sunk cost fallacy can also influence larger decisions, such as leaving a Ph.D. program when it's no longer fulfilling.

Game theory initially focused on zero-sum games, analyzing the best strategies for winning and losing scenarios.

The 'Minimax strategy' in zero-sum games aims to minimize your maximum loss against a sophisticated opponent.

By adopting the Minimax strategy, you ensure protection against the worst-case scenario in zero-sum games.

Transcripts

- Anytime that you're interacting with another person

who has their own interests and is trying

to achieve their own ends,

they are trying to do the best they can,

given what they want;

you're trying to do the best you can,

given what you want,

and so you're interacting in a strategic situation.

'Game theory' is a mathematical theory

that attempts to make sense of how it is

that people interact in these strategic situations.

- John von Neumann wrote a very important book

called the "Theory of Games"

with a guy named Oskar Morgenstern.

And in there, he laid out game theory.

And game theory is:

"The study of decision-making

under conditions of uncertainty over time."

- It was originally developed in economics

in order to try and understand economic behavior,

like why people buy certain things

or why they're willing to work for certain wages.

But later on, it was expanded and applied

to a variety of different situations,

including biology, international relations,

and even interpersonal relations like friendship

and parenting and family relations.

One of the things that game theory has really shown us,

through recent study,

has been interactions that we oftentimes think

as 'zero-sum,' or competitive,

are not as competitive as they seem.

In situations like in the Cold War,

which most people thought,

that's gotta be a zero-sum game if anything is,

we discovered that actually there were opportunities

for mutual cooperation.

Arms reduction treaties are a great example.

The U.S. and the USSR figured out

that if they could find a way to cooperate,

they could both save an enormous amount of money and effort

by reducing the number of weapons that they had.

Reagan and Gorbachev negotiated the START Treaty

with one another,

and one of the big problems that they had is,

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 gonna get rid of some large percentage

of our nuclear weapons and hope

that the USSR would do so as well,"

they broke up the interaction into a bunch

of little tiny ones.

So, the USSR would eliminate just a few nuclear weapons,

then the U.S. would eliminate just a few nuclear weapons.

They would check, and then they would go on

to the next stage.

And then each would eliminate a few more,

and they'd go on to the next stage.

This process of taking a big interaction

and breaking it down into little small parts

can change a bad social dilemma

into a positive interaction.

What I do in my personal life

and I think almost everyone can do in their personal life,

is to try and think,

'In this interaction,

what outcome would be good for both parties?'

And, 'How can we achieve that outcome?'

And by thinking about everything in that way,

we oftentimes transform something that seems

like a situation where there has to be a winner

and there has to be a loser,

into one where nobody feels like they've lost

and everybody benefits.

- John von Neumann-based game theory

on a stripped down version of poker.

- In any given poker situation that you're dealing

with a lot of uncertainty

and it's all about how to make the best decision

in any given moment-

and that's so integral to life.

Everything we try to do, you know,

'Should we take this route or that route?'

'Should I go here on vacation or there?'

It's all about dealing with uncertainties

and probabilities of things happening-

and poker is a very fun and easy way

to teach someone how to do that.

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're never going to be 100% certain where you are:

are you beating them or do you have a worse hand?

So, you have to sort of construct a strategy

that is mathematically optimal in each situation.

The most damaging bias that can come up in poker,

and I also think very often in life,

is the 'Sunk cost fallacy.'

Where you'll have a lot of chips,

perhaps almost all of your stack is in the middle,

and yet, you are 85% to 90% confident

that you have the worst hand.

Putting another chip in the pot is probably not a good idea,

but we'll often go to ourselves,

"Ah, well, I've gone this far.

I've put this much in.

I might as well see it through to the end."

But if you have very strong information

that actually, from this point onwards,

putting more money in the pot is a bad idea,

then you shouldn't.

But we have this belief that,

"Well, I've put this much time in or this much effort,

that we should continue on."

That can be very, very costly.

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

that you wish you were doing differently.

Those might be small-scale.

In my case, I'm now much more willing to abandon a book

that I've realized I'm not enjoying

and not getting any value out of,

rather than trudging dutifully through the remainder

of the book just because I've already come 100 pages.

These changes might also be large-scale.

For example, I was in a Ph.D. program,

and, at a certain point, realized with increasing certainty

that I wasn't happy in this field,

and would probably be better off switching.

And that the only reason that I had stuck with it

as long as I had was because of my fear

of confronting the sunk cost of four to five years

that I'd spent preparing for and working in the Ph.D.

And sometimes it really does take time

to fully acknowledge to yourself

that you don't have any good reason

to stick with the job or Ph.D.

or project that you've been working on so long

because sunk costs are painful.

But at least having the sunk cost fallacy on your radar

means that you have the opportunity, at least,

to push past that and make the choice

that instead will lead to the better outcomes

for your future.

- Game theory spent much of its early days

analyzing zero-sum games,

where one party's gonna win and the other party's gonna lose

to trying to figure out what's the best strategy.

What game theorists have figured out

is that in zero-sum games,

the best strategy to pursue when you're against

a sophisticated opponent is to adopt the strategy

which minimizes your maximum loss.

This is sometimes called the 'Minimax strategy.'

So the idea is you think,

"What's the worst-case scenario for me?

What could my opponent do that would make me worse off?"

And then you figure out,

"What's the best strategy against that?"

So you're minimizing your maximum loss.

Game theorists proved that if you use this way of thinking,

minimizing your maximum loss, you ensure that,

no matter how sophisticated your opponent is,

you've guarded against the worst-case scenario.

And not only that, but in zero-sum games,

you've done the best you can possibly do.

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