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Game theory is the science of making good decisions in situations involving strategic interactions. Game theory gets its name from the observation that the same notions that inform how you might box or play a strategic game like chess, can also be applied to your business strategies. Game theory is particularly useful in the sort of high-stakes strategic interactions that often arise in oligopolies

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When your best choice may depend on what others choose, and their best choice may depend on what you choose.Your best choice might depend as much on the choices made by your allies as your opponents, and hence this notion of strategic interactions encompasses collaboration as much as competition.

Business decisions are strategic interactions because the payoff to, say, cutting your prices, depends on whether your competitors respond with a similar price cut. Likewise, your decision on how best to position your product is a strategic interaction because the profitability of targeting a particular market segment depends on how your competitors position their products. And your decision to enter a new market involves a strategic interaction, because your profitability depends on whether the incumbent firms will respond with a price war. Strategic interactions include partners as well as rivals, and the profitability of a new investment might depend on how much your partners invest in the project.

There are strategic interactions between both political rivals and political allies, because the payoff from voting for a bill depends on whether others vote for it, too. In elections you might choose to vote only if other voters are likely to make it a close election. There are also weighty strategic interactions when countries decide to get involved in an arms race or amass troops near the border.

Strategic interactions also occur among friends. These interactions highlight that sometimes strategy is more about cooperation and coordination rather than competition.

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Four Steps for Making Good Strategic Decisions 

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Four Steps for Making Good Strategic Decisions 

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1) Consider all the possible outcomes
To make an informed choice, you’ll need to consider all the different outcomes that could occur. This means considering every combination of choices that both you and other players might make. This can be done using a payoff table.
2) Think about the "what if's" separately
Break the problem into its simpler components, which are the various choices that the other person could make. Think in terms of “what ifs?” and write down each “what if?” separately. When you think about these separately, you get two far simpler problems. You’ll then proceed to the next step.
3) Play your best response
For each “what if?” your goal should be to play your best response—the choice that yields the highest possible payoff for you, given the other player’s choice. When you find your best response, put a check mark next to it. This check mark will help you remember your best response.
4) Put yourself in someone else's shoes
In every strategic interaction your outcomes depend on the choices that other people make. This means that you cannot figure out your best choice without first trying to figure out the choices that others will make. Put yourself in someone else’s shoes in order to figure out what decision you would make if you faced their incentives.

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A table that lists your choices in each row, the other player’s choices in each column, and so shows all possible outcomes, listing the payoffs in each cell. This tables describes the different payoffs in words. In most cases though, numbers such as grades, business profits, or some other measure of each payoff is used. When you find the best response, put a check man next to each one. The Nash equilibrium, when each player has played their best response to the choices of other player, is the outcome with a check mark from each player. In this case, the Nash equilibrium occurs when Pepsi and Coke both defect. This example specifically demonstrates the Prisoner's Dilemma.

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An equilibrium in which the choice that each player makes is a best response to the choices other players are making. It’s an equilibrium because no one can do better by changing their choice alone. When using the a payoff table and the checkmark method(putting a check next to each player's best response), look for an outcome with two check marks to find the Nash equilibrium.

Notice that in a Nash equilibrium two thing are true:

Best responses: Each player's choice is their best response to what they expect the other to choose.

Correct expectations: Each player's expectation about what the other player will choose is also correct.

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When two individuals acting in their own self-interests do not produce the optimal outcome for both parties. In the Pepsi/Coke scenario, the problem is that neither can credibly commit to cooperating, and so neither expects the other to actually cooperate, and this makes defecting the best response.

The Prisoner’s Dilemma is best read as a parable. In particular, the big insight is that people often fail to cooperate even when there’s a project that could make them all better off. Even though the benefits of cooperation exceed the benefits of defecting in the Prisoner’s Dilemma, defecting to take advantage of a cooperative rival yields an even bigger and more tempting payoff. That temptation can cause cooperation to fail.

These interactions can lead people to make strategic choices that lead to inefficient outcomes. And so in a world full of strategic interactions, there’s no reason to assume that free markets will yield good outcomes.

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When there is more than one equilibrium. For instance, a call between two parties is dropped. Should party one call back and party two wait for the call? Or should party two call back and party one wait? Both scenarios are equilibriums.

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When all players have a common interest in coordinating their choices. The problem is that coordination is difficult when there’s more than one equilibrium. Scenarios involving coordination games include phone tag(who calls back and who wait for the call?); the adoption of new technology(you and your friends want gaming systems to play together. Xbox or Playstation?); coordinating business(customers want to shop when stores are open, stores want to open when customers want to shop); political revolutions and protests(Should you and others protest or not?); and relationships(should we remain friends or become romantic?)

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When your best response is to take a different (but complementary) action to the other player. Phone tag can be thought of as an anti-coordination game in the sense that party one wants to call party two if they're waiting, or vice versa. Similarly, market entry can be thought of the same way: Will you enter this new market or will I? If we both enter, we'll compete and yield losses. If we both don't enter, neither of us will make profits at all. One should enter and the other should not. Other examples include traffic games(if everyone takes the highway or backroads, traffic jams occur. Some taking backroads and some taking the high results in a smooth trip); bargaining dynamic(if you and your both are both aggressive or passive, a subpar deal could be made or it could fail altogether).

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The problem posed by multiple equilibria is complicated further when considering there are situations in which there's a good and bad equilibrium, and the bad equilibrium is worse for everyone. For instance, When you give your savings to the bank, they don’t just store it in a vault, instead they lend a lot of it out. This means that if too many people want to withdraw their savings at the same time, the vault will quickly empty, and people at the back of the line won’t get paid. In the good equilibrium, the banking system works perfectly: All savers are happy keeping their money in the bank earning interest, because that is a best response for each of them when everyone else also keeps their money in the bank.

But there’s also a bad equilibrium, which corresponds to a bank run: If you believe that many other people are going to withdraw their money, your best response is to run to the bank to withdraw your savings, before the vault empties. A bank run occurs because everyone tries to withdraw their money before everyone else, and this is a best response for each of them given that everyone else is trying to withdraw their money. This type of bank run leads the bank to collapse and can catalyze a broader economic disaster.

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Three solutions to coordination problems:

Communication.

Communicating the desired equilibrium before the game can help to coordinate. But in many other strategic games, players have opposing incentives, so communication won’t work because you’re suspicious that the other player may be trying to fool you, much as we saw in the Prisoner’s Dilemma.

Focal points, culture, and norms.

Sometimes, we figure out how to coordinate our actions by just thinking about what seems most natural. Players rely on focal points(a cue from outside the game) to help coordinate on a particular equilibrium. Social conventions and norms provide common focal points. For instance, it is the norm in the US to eat lunch around noon, which can indicate a good time to meet a friend for lunch.

Laws and regulations.

When focal points and social conventions don’t naturally arise, then there’s a natural role for government laws and regulations to help enforce coordination. To take a simple example, if other people drive on the left-hand side of the road, then your best response is also to drive on the left. But if they drive on the right-hand side, then your best response is also to drive on the right. So should you drive on the left- or the right-hand side of the road?

Either works, it’s just important that we all choose the same one. And so this is why we have traffic laws.

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The strategic gain from an anticipatory action that can force a rival to respond less aggressively. To gain this advantage, one has to fully commit to their first response by taking concrete actions that'll make any other choice costly. That is, the first-mover advantage occurs when one commits to being aggressive.

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Shows how a game plays out over time, with the first move forming the trunk, and then each subsequent choice branching out, so the final leaves show all possible outcomes.

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The strategic gain from an anticipatory action that can force a rival to respond less aggressively. To gain the advantage, a player must credibly commit to their first response by taking concrete actions that'll make any other choice costly.

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Shows how a game plays out over time, with the first move forming the trunk, and then each subsequent choice branching out, so the final leaves show all possible outcomes.The game tree is helpful in games that play out over time because figuring out your best response requires that you look forward and reason backward.

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Look Forward: In games that play out over time, a player needs to anticipate the likely consequences of their decisions.

Reason Backward: Start by analyzing the last period of the game. Use this to figure what will happen in the second-to-last period, and keep reasoning backward until you can see all the consequences that follow from today’s decision.

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A method for solving game trees: Start by looking forward to the final period and highlighting out your rival’s best responses, then prune the options the rival would never choose—the “dead leaves”—off your game tree. Next, reason backward, by going one step closer to the base of the tree. Given the remaining branches and the leaves that they lead to, what choice will you make? Highlight that choice, then prune the other options, and keep going until you’ve reasoned back to today’s decision. If you’ve found a highlighted route all the way from the leaves in the last period to the trunk at the first period, then that’s the equilibrium, as it involves each player making a best response at each stage of the game.

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The strategic advantage that can follow from taking an action that adapts to your rival’s choice. The second-mover advantage arises because it gives you the flexibility to adapt your strategy in light of the choices made by the first mover.

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One-Shot, Repeated, Finitely Repeated Games, and Indefinitely Repeated Games

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One-Shot, Repeated, Finitely Repeated Games, and Indefinitely Repeated Games

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One-Shot Game: Strategic interaction that occurs only once. In a one-shot game you don’t need to worry about how today’s decision might change how other others will treat you in the future.

Repeated Game: When you face the same strategic interaction with the same rivals and the same payoffs in successive periods.

Finitely Repeated Games: When you face the same strategic interaction a fixed number of times. Finitely repeated games are solved by looking forward and reasoning backward.

Indefinitely Repeated Games: When you face the same strategic interaction an unknown number of times. This is important because, if you don’t know when your interactions will end, there’s no last period in which you or your rival will definitely be tempted to defect. And this undermines the logic that leads you to want to defect in earlier periods.

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A list of instructions that describes exactly how to respond in any possible situation. Importantly, your strategic plan may depend on past choices made by other players. This means that your strategic plan might include a threat to your rivals that if they defect from a collusive agreement, you’ll follow up with a punishment. If that threat is credible, it might be sufficient to elicit cooperation in an indefinitely repeated Prisoner’s Dilemma.

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If the other players have cooperated in all previous rounds, you will cooperate. But if any player has defected in the past, you will defect. Effectively this strategy says: I’m willing to cooperate, but if you fail to play along, I’ll punish you by defecting forever. You can see how this might provide a strong incentive for your rivals to cooperate!

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Question to deepen understanding and practice

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Question to deepen understanding and practice

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How Game Theory Strategy Improves Decision Making

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How Game Theory Strategy Improves Decision Making

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Game theory, the study of strategic decision-making, brings together disparate disciplines such as mathematics, psychology, and philosophy. Game theory was invented by John von Neumann and Oskar Morgenstern in 1944 and has come a long way since then. The importance of game theory to modern analysis and decision-making can be gauged by the fact that since 1970, as many as 12 leading economists and scientists have been awarded the Nobel Prize in Economic Sciences for their contributions to game theory.

Game theory is applied in a number of fields, including business, finance, economics, political science, and psychology. Understanding game theory strategies-both the popular ones and some of the relatively lesser-known stratagems-is important to enhance one's reasoning and decision-making skills in a complex world.

Key Takeaways

Prisoner's Dilemma

One of the most popular and basic game theory strategies is the prisoner's dilemma. This concept explores the decision-making strategy taken by two individuals who, by acting in their own individual best interest, end up with worse outcomes than if they had cooperated with each other in the first place.

In the prisoner's dilemma, two suspects apprehended for a crime are held in separate rooms and cannot communicate with each other. The prosecutor informs both Suspect 1 and Suspect 2 individually that if he confesses and testifies against the other, he can go free, but if he does not cooperate and the other suspect does, he will be sentenced to three years in prison. If both confess, they will get a two-year sentence, and if neither confesses, they will be sentenced to one year in prison.

While cooperation is the best strategy for the two suspects, when confronted with such a dilemma, research shows most rational people prefer to confess and testify against the other person than stay silent and take the chance the other party confesses.

The prisoner's dilemma lays the foundation for advanced game theory strategies, of which the popular ones include:

Matching Pennies

This is a zero-sum game that involves two players (call them Player A and Player B) simultaneously placing a penny on the table, with the payoff depending on whether the pennies match. If both pennies are heads or tails, Player A wins and keeps Player B's penny. If they do not match, Player B wins and keeps Player A's penny.

This is a social dilemma scenario like the prisoner's dilemma in that two players can either cooperate or defect (i.e. not cooperate). In a deadlock, if Player A and Player B both cooperate, they each get a payoff of 1, and if they both defect, they each get a payoff of 2. But if Player A cooperates and Player B defects, then A gets a payoff of 0 and B gets a payoff of 3. In the payoff diagram below, the first numeral in the cells (a) through (d) represents Player A's payoff, and the second numeral is that of Player B:

Deadlock differs from a prisoner's dilemma in that the action of greatest mutual benefit (i.e. both defect) is also the dominant strategy. A dominant strategy for a player is defined as one that produces the highest payoff of any available strategy, regardless of the strategies employed by the other players.

A commonly cited example of deadlock is that of two nuclear powers trying to reach an agreement to eliminate their arsenals of nuclear bombs. In this case, cooperation implies adhering to the agreement, while defection means secretly reneging on the agreement and retaining the nuclear arsenal. The best outcome for either nation, unfortunately, is to renege on the agreement and retain the nuclear option while the other nation eliminates its arsenal since this will give the former a tremendous hidden advantage over the latter if war ever breaks out between the two. The second-best option is for both to defect or not cooperate since this retains their status as nuclear powers.

Cournot Competition

This model is also conceptually similar to the prisoner's dilemma and is named after French mathematician Augustin Cournot, who introduced it in 1838. The most common application of the Cournot model is in describing a duopoly or two main producers in a market.

For example, assume companies A and B produce an identical product and can produce high or low quantities. If they both cooperate and agree to produce at low levels, then limited supply will translate into a high price for the product on the market and substantial profits for both companies. On the other hand, if they defect and produce at high levels, the market will be swamped and result in a low price for the product and consequently lower profits for both. But if one cooperates (i.e. produces at low levels) and the other defects (i.e. surreptitiously produces at high levels), then the former just break even while the latter earns a higher profit than if they both cooperate.

The payoff matrix for companies A and B is shown (figures represent profit in millions of dollars). Thus, if A cooperates and produces at low levels while B defects and produces at high levels, the payoff is as shown in the cell (b)-break-even for company A and $7 million in profits for company B.

Coordination Game

In coordination, players earn higher payoffs when they select the same course of action.

As an example, consider two technology giants who are deciding between introducing a radical new technology in memory chips that could earn them hundreds of millions in profits, or a revised version of an older technology that would earn them much less. If only one company decides to go ahead with the new technology, rate of adoption by consumers would be significantly lower, and as a result, it would earn less than if both companies decide on the same course of action. The payoff matrix is shown below (figures represent profit in millions of dollars).

Thus, if both companies decide to introduce the new technology, they would earn $600 million apiece, while introducing a revised version of the older technology would earn them $300 million each, as shown in the cell (d). But if Company A decides alone to introduce the new technology, it would only earn $150 million, even though Company B would earn $0 (presumably because consumers may not be willing to pay for its now-obsolete technology). In this case, it makes sense for both companies to work together rather than on their own.

Centipede Game

This is an extensive-form game in which two players alternately get a chance to take the larger share of a slowly increasing money stash. The centipede game is sequential since the players make their moves one after another rather than simultaneously; each player also knows the strategies chosen by the players who played before them. The game concludes as soon as a player takes the stash, with that player getting the larger portion and the other player getting the smaller portion.

As an example, assume Player A goes first and has to decide if he should "take" or "pass" the stash, which currently amounts to $2. If he takes, then A and B get $1 each, but if A passes, the decision to take or pass now has to be made by Player B. If B takes, she gets $3 (i.e. the previous stash of $2 + $1) and A gets $0. But if B passes, A now gets to decide whether to take or pass, and so on. If both players always choose to pass, they each receive a payoff of $100 at the end of the game.

The point of the game is if A and B both cooperate and continue to pass until the end of the game, they get the maximum payout of $100 each. But if they distrust the other player and expect them to "take" at the first opportunity, Nash equilibrium predicts the players will take the lowest possible claim ($1 in this case). Experimental studies have shown, however, this "rational" behavior (as predicted by game theory) is seldom exhibited in real life. This is not intuitively surprising given the tiny size of the initial payout in relation to the final one. Similar behavior by experimental subjects has also been exhibited in the traveler's dilemma.

Traveler's Dilemma

This non-zero-sum game, in which both players attempt to maximize their own payout without regard to the other, was devised by economist Kaushik Basu in 1994. For example, in the traveler's dilemma, an airline agrees to pay two travelers compensation for damages to identical items. However, the two travelers are separately required to estimate the value of the item, with a minimum of $2 and a maximum of $100. If both write down the same value, the airline will reimburse each of them that amount. But if the values differ, the airline will pay them the lower value, with a bonus of $2 for the traveler who wrote down this lower value and a penalty of $2 for the traveler who wrote down the higher value.

The Nash equilibrium level, based on backward induction, is $2 in this scenario. But as in the centipede game, laboratory experiments consistently demonstrate most participants, naively or otherwise, pick a number much higher than $2.

Traveler's dilemma can be applied to analyze a variety of real-life situations. The process of backward induction, for example, can help explain how two companies engaged in a cutthroat competition can steadily ratchet product prices lower in a bid to gain market share, which may result in them incurring increasingly greater losses in the process.

Battle of the Sexes

This is another form of the coordination game described earlier, but with some payoff asymmetries. It essentially involves a couple trying to coordinate their evening out. While they had agreed to meet at either the ball game (the man's preference) or at a play (the woman's preference), they have forgotten what they decided, and to compound, the problem, cannot communicate with one another. Where should they go? The payoff matrix is shown below with the numerals in the cells representing the relative degree of enjoyment of the event for the woman and man, respectively. For example, cell (a) represents the payoff (in terms of enjoyment levels) for the woman and man at the play (she enjoys it much more than he does). Cell (d) is the payoff if both make it to the ball game (he enjoys it more than she does). Cell (c) represents the dissatisfaction if both go not only to the wrong location but also to the event they enjoy least-the woman to the ball game and the man to the play.

Dictator Game

This is a simple game in which Player A must decide how to split a cash prize with Player B, who has no input into Player A's decision. While this is not a game theory strategy per se, it does provide some interesting insights into people's behavior. Experiments reveal about 50% keep all the money to themselves, 5% split it equally and the other 45% give the other participant a smaller share. The dictator game is closely related to the ultimatum game, in which Player A is given a set amount of money, part of which has to be given to Player B, who can accept or reject the amount given. The catch is if the second player rejects the amount offered, both A and B get nothing. The dictator and ultimatum games hold important lessons for issues such as charitable giving and philanthropy.

This is a variation of the prisoner's dilemma in which the "cooperate or defect" decisions are replaced by "peace or war." An analogy could be two companies engaged in a price war. If both refrain from price cutting, they enjoy relative prosperity (cell a), but a price war would reduce payoffs dramatically (cell d). However, if A engages in price-cutting (i.e., "war") but B does not, A would have a higher payoff of 4 since it may be able to capture substantial market share, and this higher volume would offset lower product prices.

Volunteer's Dilemma

In a volunteer's dilemma, someone has to undertake a chore or job for the common good. The worst possible outcome is realized if nobody volunteers. For example, consider a company where accounting fraud is rampant but top management is unaware of it. Some junior employees in the accounting department are aware of the fraud but hesitate to tell top management because it would result in the employees involved in the fraud being fired and most likely prosecuted.

Being labeled as a whistleblower may also have some repercussions down the line. But if nobody volunteers, the large-scale fraud may result in the company's eventual bankruptcy and the loss of everyone's jobs.

Frequently Asked Questions

What Are the 'Games' Being Played in Game Theory?

It is called game theory since the theory tries to understand the strategic actions of two or more "players" in a given situation containing set rules and outcomes. While used in a number of disciplines, game theory is most notably used as a tool within the study of business and economics. The "games" may thus involve how two competitor firms will react to price cuts by the other, if a firm should acquire another, or how traders in a stock market may react to price changes. In theoretic terms, these games may be categorized as similar to prisoner's dilemmas, the dictator game, the hawk-and-dove, and battle of the sexes, among several other variations.

What Does the Prisoner's Dilemma Teach Us?

The prisoner's dilemma shows that simple cooperation is not always in one's best interests. In fact, when shopping for a big-ticket item such as a car, bargaining is the preferred course of action from the consumers' point of view. Otherwise, the car dealership may adopt a policy of inflexibility in price negotiations, maximizing its profits but resulting in consumers overpaying for their vehicles. Understanding the relative payoffs of cooperating versus defecting may stimulate you to engage in significant price negotiations before you make a big purchase.

What is a Nash Equilibrium in Game Theory?

Nash equilibrium in game theory is a situation in which a player will continue with their chosen strategy, having no incentive to deviate from it, after taking into consideration the opponent's strategy.

How Can Businesses Use Game Theory as They Compete with One Another?

Cournot competition, for example, is an economic model describing an industry structure in which rival companies offering an identical product compete on the amount of output they produce, independently and at the same time. It is effectively a prisoner's dilemma game.

The Bottom Line

Game theory can be used very effectively as a tool for decision-making whether in an adversarial, business, or personal setting.

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How Game Theory Strategy Improves Decision Making

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Game theory, the study of strategic decision making can be used in many fields, including business, finance, and economics to improve decision making.

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Series of Podcasts explaining Game Theory 

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Series of Podcasts explaining Game Theory 

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(ECON 159) This course is an introduction to game theory and strategic thinking. Ideas such as dominance, backward induction, Nash equilibrium, evolutionary stability, commitment, credibility, asymmetric information, adverse selection, and signaling are discussed and applied to games played in class and to examples drawn from economics, politics, the movies, and elsewhere.

This course was recorded in Fall 2007.

(ECON 159) This course is an introduction to game theory and strategic thinking. Ideas such as dominance, backward induction, Nash equilibrium, evolutionary stability, commitment, credibility, asymmetric information, adverse selection, and signaling are discussed and applied to games played in class and to examples drawn from economics, politics, the movies, and elsewhere.

This course was recorded in Fall 2007.

Awesome

Excellent course! Very entertaining and engaging. The only negative is that the audio is quite soft and sometimes hard to hear. Excellent otherwise.

A very interesting course led by an entertaining instructor.

I really enjoyed listening to this course. Material was I presented and interesting enough to keep me engaged.

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(ECON 159) This course is an introduction to game theory and strategic thinking. Ideas such as dominance, backward induction, Nash equilibrium, evolutionary stability, commitment, credibility, asymmetric information, adverse selection, and signaling are discussed and applied to games played in class...

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Game Theory: The Science of Decision-Making

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Multiple Game Theory Podcasts From Freakonomics

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Multiple Game Theory Podcasts From Freakonomics

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How to Listen

You want to listen to Freakonomics Radio? That's great! Most people use a podcast app on their smartphone. It's free (with the purchase of a phone, of course). Looking for more guidance? We've got you covered.

Freakonomics Radio Network Newsletter

Stay up-to-date on all our shows. We promise no spam.

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You want to listen to Freakonomics Radio? That's great! Most people use a podcast app on their smartphone. It's free (with the purchase of a phone, of course). Looking for more guidance? We've got you covered. Stay up-to-date on all our shows. We promise no spam.

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How Pop Culture Can Help Teach Game Theory

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How Pop Culture Can Help Teach Game Theory

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I found this article very interesting! It explains how game theory can be used in a way students are more likely to understand, comparing it to a popular tv show.

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It's that scene from Squid Game which delivers the sucker-punch to the unsuspecting viewer's gut: when the giant kewpie doll swivels her head and competitors are gunned down in a split second of shocking brutality.

, the dystopian South Korean survival drama, is the most watched Netflix show of all time, its deceptively childlike recorder-based theme song is an earworm of evil, forever seared into our cultural psyche.

The plot sees a group of people who are heavily indebted and vulnerable, risking their lives to play a series of popular children's games with a life-changing multimillion-dollar prize for the winner.

But, there's a deadly twist - lose and you die.

It is a violent test of morality and humanity.

Squid Game 's tentacle-like grip on global pop culture is unprecedented and researchers at the Monash School of Business have identified how the smash hit TV series can be used to teach game theory, one of the most challenging concepts in introductory economics.

In the paper ' Using Squid Game to Teach Game Theory ', Associate Professor Wayne Geerling and his co-authors have outlined how the life-or-death games at the centre of the show's plot can teach strategy, collusion, co-operation, risk aversion, information asymmetry and many other real-world business and economics applications.

"Game theory has a lot of real-world applications to everyday life situations, from games to sport, from politics to war."

By analysing three key games from Squid Game, they've created a series of teaching guides that can be adapted to any course on game theory around the world. With a few subtle tweaks, the teaching guides could also be used to teach broader issues such as inequality, debt and poverty.

Game theory is the science of strategic behaviour, where the outcome of each player depends on the actions of all players.

"Game theory has a lot of real-world applications to everyday life situations, from games to sport, from politics to war," says Associate Professor Geerling.

"Think back to the start of the COVID-19 pandemic when we saw the hoarding of toilet paper. People didn't need to buy toilet paper but once they did, others observed this behaviour and a rush began.

"Consequently, we created a shortage of toilet paper that was completely avoidable. The lesson here is that strategic behaviour doesn't always lead to positive outcomes."

"Players in Squid Game also serve as a metaphor for modern-day companies, who have to interact, adapt, think in real time and make interactive decisions in strategic situations, often without the advantage of full information."

The players in Squid Game are not given any clues in advance about the games they are playing and given the lack of information, it is difficult for them to work out their optimal strategies to maximise their chances of staying alive.

The use of Squid Game in introductory economics at the Monash Business School points to a much bigger strategic plan to continually inspire students to better learning using more contemporary means.

"The real world is highly strategic," says Associate Professor Geerling. "We look around, observe the behaviour of others before making decisions. We need to train and prepare students to think strategically to help them survive in the real world."

"The important thing is that we continue to innovate in our teaching practices and Squid Game is just one great example of how we can do that. The future of teaching economics will include, among other things, simulations, experiments, case studies and interactive games."

Associate Professor Geerling has championed the use of pop culture as one medium to make the learning of economics more relatable to a diverse student body.

"Many students struggle to think in a strategic manner when material is taught through traditional methods alone," he says.

"Pop culture, such as Squid Game, can be used as an effective medium to break down barriers to learning, as it helps students find practical applications to complement the abstract theory.

"The economics discipline around the world has been notorious for its continued reliance on 'chalk and talk' to deliver lectures but a significant amount of more recent work focuses on innovative ways to teach economics concepts.

"In recent years, a literature in economics education has emerged, which uses visual examples from pop culture - movies, music, TV - to demonstrate economics concepts to a wider audience in a non-technical, jargon-free manner.

"I want to change the perception of how economics is taught. The millennial generation is unlike previous generations of students; they have different learning and behavioural habits.

"The important thing is that we continue to innovate in our teaching practices and Squid Game is just one great example of how we can do that. The future of teaching economics will include, among other things, simulations, experiments, case studies and interactive games."

In their paper, Geerling and his co-authors have outlined comprehensive teaching guides which are available to educators globally, including digital clips, descriptions, warm-up activities, questions and answers.

It's a one-stop shop for anyone teaching game theory who is open-minded about using pop culture. Perhaps the next generation of business and economics leaders will be the Class of Squid Game.

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Squid pro quo: How pop culture can help teach economic theory

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Squid Game's tentacle-like grip on global pop culture is unprecedented and researchers have identified how the smash hit TV series can be used to teach game theory, one of the most challenging concepts in introductory economics. Read more at Monash Lens

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Although this article is 2 years old now, it is still interesting to read through. It discusses two differing methods to prioritize COVID-19 vaccinations. While this isn't a pressing issue currently, it's still a good example of a current event in relation to game theory and the Prisoner's Dilemma Game.

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Using game theory, researchers modeled two ways of prioritizing vaccinations, to see which saved more lives.

Madhur Anand, an ecologist, right, and Chris Bauch, a mathematical biologist, focus their research on the interplay between human behavior and environment systems. Credit... Ian Willms for The New York Times

Madhur Anand, an ecologist, and her husband, Chris Bauch, a mathematical biologist, were optimally situated during the spring lockdown, working from home in Guelph, Ontario, to watch the pandemic play out - and to discuss patterns of behavior, within their community and beyond, as we all tried to keep safe and carry on.

Their offices at home are separated only by a wall, rather than a 45-minute drive. Dr. Anand is the director of the new Guelph Institute for Environmental Research at the University of Guelph, and Dr. Bauch runs a lab at the University of Waterloo. The couple's collaborative research usually focuses on the interplay between human behavior and environment systems - for instance, with pollution, deforestation and climate change. Whereas those dynamics unfold slowly, the pandemic provided an acute example of rapid change.

"Societal change is not the kind of thing you can easily experiment with," Dr. Anand said. "But here we were in the middle of a huge social experiment."

Like many scientists, they redirected their research to Covid-19. The resulting study, led by their doctoral student Peter Jentsch and currently under peer review, looked at vaccination prioritization: To save the most lives, who should get the vaccine first?

As infectious disease studies go, their methodology was somewhat atypical because it applied game theory, a mathematical way of modeling how people make strategic decisions within a group. Each individual has choices, but the payoff for each choice depends on choices made by others. This is what's called a "prisoner's dilemma game" - players weigh cooperation against betrayal, often producing a less than optimal outcome for the common good.

The pandemic presents an everyday complexity of such choices. Imagine, Dr. Bauch said, if everyone followed public health recommendations: They wore masks, socially distanced, washed their hands, followed stay-at-home orders. "In that case there is a significantly reduced risk of infection," he said.

But there are always trade-offs and temptations to defect from the regimen. Masks are annoying. Hand-washing is tedious. You need a hug.

"The pandemic is a prisoner's dilemma game played out repeatedly," Dr. Bauch said. In lectures, he invokes a comparison between Ayn Rand, who made a virtue of selfishness, and the "Star Trek" character Spock, who said, "The needs of the many outweigh the needs of the few."

Now the vaccine adds one more protective layer. The perceived benefits and costs of vaccination are often expressed as concerns about safety and side effects. If you are on the fence about vaccination, you might decide - noticing lower infection rates as vaccination campaigns gain speed - that it no longer seems so critical to get the jab.

"Some people might play a ' wait-and-see game,'" Dr. Bauch said. People who choose not to be vaccinated effectively get a free ride, reaping the benefits of reduced virus transmission generated by the people who do opt for vaccination. But the free rides generate a collective threat.

"That is the prisoner's dilemma," Dr. Bauch said. When infection levels are low, people feel less at risk, let down their guard, and then infection levels again rise; the ebb and flow between our behavior and the virus causes the pandemic waves. "We end up in this unhappy medium," he said.

John von Neumann, a mathematician. left, and the economist Oskar Morgenstern, who developed the idea of game theory. Credit... Corbis, via Getty Images, left; Ralph Morse/The LIFE Picture Collection, via Getty Images

The origins of game theory can be found in the 1944 book " Theory of Games and Economic Behavior," by the mathematician John von Neumann and the economist Oskar Morgenstern. The applications range from evolution to psychology to computer science; there's even a book called " The Game Theorist's Guide to Parenting."

Dr. Bauch did pioneering work combining game theory and epidemiological modeling, with colleagues including Alison Galvani, an epidemiologist and the director of the Yale Center for Infectious Disease Modeling and Analysis.

"Vaccination decisions based purely on self-interest can lead to vaccination coverage that is lower than what is optimal for society overall," Dr. Galvani said in an email.

The self-interest strategy maximizing individual payoff is called the Nash equilibrium. Dr. Galvani's later research included psychological data and demonstrated that vaccination decisions can be influenced by altruism, thereby boosting uptake beyond the Nash equilibrium and serving the common good.

She noted, however, that game theory assumes people are rational in their decision-making. Fear can suppress vaccination "to precarious levels insufficient to prevent the spread of an outbreak," she said.

A 2019 investigation using game theory to study vaccination showed that vaccine hesitancy could be explained by a mathy mechanism called "hysteresis." In general terms, hysteresis occurs when the effects of a force persist even after the force is removed - the response lags. Paper clips exposed to a magnetic field still cling together after the field is turned off; unemployment rates can remain high even in a recovery economy.

Similarly, even after a vaccine is deemed safe and efficacious, uptake rates often remain low.

"The hysteresis effect makes the population hysterical, or sensitive, to the perceived risks of the vaccine," said Xingru Chen, a doctoral student in mathematics at Dartmouth College, and the paper's co-author, with her adviser Feng Fu, a mathematician and biomedical data scientist (who recently applied a similar approach to the dilemma of social distancing).

"It boils down to a fundamental problem known as the tragedy of the commons," Ms. Chen said. "There is a misalignment of individual interests and societal interests." To overcome the hysteresis effect, she said, vaccination should be promoted as an act of altruism - one's personal contribution to defeating the pandemic.

A subsequent iteration of the coronavirus game-theory study explored how vaccine compliance affects the number of deaths prevented. If a small subset of the population chooses not to get the vaccine, it affects us all, said Dr. Anand, who is also an author and a poet. Her book "A New Index for Predicting Catastrophes" includes found poems composed of words from her scientific papers.

(One poem, "The Strategy of the Majority, " was drawn from her first paper on human-environment systems, which inspired the current study. The last line: "the price of finding equilibria is increasing.")

Sebastian Funk, an infectious disease epidemiologist at the London School of Hygiene and Tropical Medicine, said that the coronavirus study nicely highlighted the importance of assessing how interventions aiming to contain spread during an outbreak can affect human behavior. "Excluding this from models of infectious disease transmission can be a major limitation," he said.

Dr. Funk and others have investigated how spreading awareness can shift the shape of epidemics.

Infectious disease models usually fail to appreciate the flux of human behavior, treating it instead as a constant, Dr. Bauch said. But, he added, it's not as if humans are too complex to model: "I see that point of view as a last vestige of the idea that 'humans are special,' from the time when we thought the earth was the center of the universe."

In his lectures, Dr. Bauch invokes Ayn Rand, who made a virtue of selfishness, versus Mr. Spock, who said, "The needs of the many outweigh the needs of the few." Credit... Bettmann/Getty Images, left; Allyn Baum/The New York Times

While holed up at home, Dr. Anand and Dr. Bauch oversaw some pandemic research by their children, 11 and 13, who produced a series of " adults get schooled " videos. The first explored the mathematics behind flattening the curve, the latest explains how to make a simple epidemic model with Google spreadsheets.

The Coronavirus Pandemic: Key Things to Know

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Meanwhile, their student Mr. Jentsch had just submitted a paper applying game theory to invasive species, looking at the spread of the emerald ash borer, an invasive beetle. Dr. Anand and Dr. Bauch suggested that he next aim the game theory model at Covid-19 vaccination prioritization.

Vaccines can work in two ways.

"Direct protection" protects people who get vaccinated - for example, those who are high-risk, such as health care and essential workers, people with underlying medical conditions and older adults. In terms of direct protection, the study focused on people over 60 years old.

"Indirect protection" protects the contacts of people who are vaccinated; the high-risk population is shielded by vaccinating the individuals who are most likely to transmit the virus, such as younger people, even if they are themselves less vulnerable to the disease.

The study's methodology combined two types of models. One was an epidemiological model of virus transmission, a workhorse used for decades that factors in things like seasonality, susceptibility to infection according to age, and variations in the vaccine's performance.

The other, a game-theory model, factored in human behavior, and drew on Google data that revealed who went where and when in Ontario from March to November. This data was used as a proxy, approximating how stringently people adhered to social distancing and other public health advice over time.

The researchers first did a test run of sorts for their combined model, comparing it to the timeline of the pandemic waves so far, March through November. They found a good fit; the model's projections accurately mirrored our behavioral reality: As Covid-19 cases increased in the spring, the time that people spent at retail, recreation and workplace destinations decreased; over the summer cases trailed off slowly, not abruptly, indicating that as people saw the peak flattening they relaxed their guard.

This shows "that you can model human population behavior with simple models," Dr. Bauch said.

Then the researchers ran their model to see what lies ahead - specifically, to project the effectiveness of the different approaches to prioritizing vaccinations.

The model found that if vaccines are available sufficiently early in the pandemic, say January to March 2021 (with 2.5 percent of the population vaccinated per week), then direct protection would prevent more deaths. But if vaccines are not available until later, say July to September, by which time there is more natural immunity, then indirect protection would be more effective at reducing mortality.

(Of course, there are limitations to the model's predictions, and certain provisos. Perhaps most crucially, the study assumes that the Covid-19 vaccines block not only disease but also transmission - this is still an unknown.)

They also ran a version of the conventional model alone, not factoring in human behavior modeled from the Google data; instead, behavior was assumed to be constant.

In this scenario, the timing of pandemic waves turned out to be very different; factoring in how people behaved had a big impact on estimates of how many people got infected over time and, in turn, the most effective vaccination strategies.

Incorporating game theory, Mr. Jentsch said, injects an interesting dose of "realism." It captures how people respond to the ups and downs of daily existence, and how our actions in turn make all the difference. An army of umbrellas won't change the weather, but vaccination can be a powerful force in defeating the coronavirus.

Vaccination campaigns now underway in Canada and the United States follow the direct protection approach. Because the coronavirus is more widespread south of the shared border, "the best time for the 'switch' to indirect protection may occur sooner in the U.S.," Dr. Bauch said.

Also, he noted, "indirect protection could be a useful route for low- and middle-income countries who will not get the vaccine as soon as wealthy countries."
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'The Pandemic Is a Prisoner's Dilemma Game'

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Using game theory, researchers modeled two ways of prioritizing vaccinations, to see which saved more lives. Madhur Anand, an ecologist, and her husband, Chris Bauch, a mathematical biologist, were optimally situated during the spring lockdown, working from home in Guelph, Ontario, to watch the pandemic play out - and to discuss patterns of behavior, within their community and beyond, as we all tried to keep safe and carry on.

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Game Theory and Oligopoly: Crash Course Economics #26

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Game Theory & Ukraine-Russian Negotiations

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Game Theory & Ukraine-Russian Negotiations

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This article is a bit more pertinent as it discusses the winning and losing payoffs as well as the strategic choices in the growing conflict.

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Ukrainian and Russian negotiation teams meet in Homyel, Belarus, February 28, 2022

Zelenskiy is now calling for direct negotiations with the Russian President, Vladimir Putin. But the backdrop to the negotiations will be key.

At home, Russia is increasingly paralyzed by sanctions designed to deepen its financial isolation and cause economic chaos. From its central bank to oil, gas, agricultural and precious metal exports, sanctions have - for the present - dislodged Russian economic entities from the global financial system.

And still the war rages. Russian troops are now opting for attrition, using heavy artillery rather than precision munitions to pummel key towns, guerrilla tactics to subdue municipal areas, and border blockades at key naval ports to starve remaining pockets of resistance into submission.

A fortnight ago, both sides entered negotiations with clear red lines. A 15-point "neutrality plan" has since emerged between Ukraine and Russia, with input from Poland, the Czech Republic, and Slovenia. But at present the two sides seem further apart than ever.

Game theory can suggest likely next steps. Both sides are analysing their preferred passive or aggressive options, and how this translates into a strategic win, loss, or neutral outcome.

Strategic Choices

Game theory is the formal study of strategic choices between two sides. It's useful to decision makers because it can illustrate the range of options open to combatants within a given crisis, and also map the likely "wins and losses" strategically decided upon by the parties involved. The challenge is applying a hypothetical spectrum to the range of passive and aggressive options, and their consequences in Ukraine today.

To work out the possible spectrum of wins and losses as perceived by Ukraine and Russia, game theory has to align three key variables. First is the likelihood of clear escalation set against de-escalation, which can torpedo or consolidate negotiations.

So far, things don't look good. Russian aggression has arguably continued to increase. The two sides are now locked in game theory's zero-sum scenario, where a loss for one side represents an immediate gain for the other side.

Ukraine's Deputy Prime Minister Iryna Vereshchuk has said, "There can be no talk of any surrenders, laying down of arms. We have already informed the Russian side about this." Zelensky's response has been similarly steadfast.

The second factor is the diplomatic countermoves undertaken in parallel to the war by the US, the EU and NATO. The recent high-stakes diplomacy has led to a profound closing of ranks, with the Biden meeting in Brussels and Poland with European, Nato and Ukrainian diplomatic, foreign, and defense chiefs. Here, countermoves appear to be combining both enhanced strategic deployment of hardware to Ukraine and further diplomatic sanctions against Russia.

Third is the likelihood of a winning or losing payoff for both sides. Russia's payoffs have shifted from an entirely Moscow-run Ukraine to continued war by attrition, and Moscow is therefore likely to negotiate on consolidating or possibly reducing territories seized since February, rather than in 2014.

Western payoffs range from a worst-case scenario including the decimation of eastern Ukraine, to outcomes of a divided and politically neutral country, to preferred options of post-crisis - albeit long-term - rehabilitation. Whether payoffs translate as wins, losses, or neutral depends entirely on how these individual moves are perceived by Ukrainian and Russian decision makers, and western audiences.

What Now?

Game theory is great at plotting the options, but crises don't stand still. So, to truly shift the dial with Russian decision makers from tolerable to intolerable losses, Biden and his European allies now need to signal two things to Moscow.

First, Russia is now facing its own endgame in Ukraine, meaning that it can't hope to actually win this conflict and that committing to a ceasefire is only possible response. Second - and this is key to game theory - that in terms of pursuing its own "wins" in Ukraine, the west is not bluffing. It will maintain a unified and permanent pushback, from sanctions to diplomacy, from lethal arms supplies to humanitarian assistance.

In game theory terms, it's unlikely Putin or his regime will ever accept that it has lost this war, or negotiate from that position. Nor is Ukraine likely to permit Russian territorial gains to be seen as "wins", or their own defence as anything less than a moral and material win.

Nevertheless, negotiations will have to take place on the basis that the Ukraine crisis, however unjustly, constitutes a series of diminished - even "neutral" - wins for both sides. And this will have to be regardless of how unevenly they represent both moral wins and actual losses for Ukraine, and tactical gains and moral losses for Russia.

Established on the foundation of a temporary ceasefire, Russia offers of withdrawal rest on emerging security guarantees, in the form of Ukraine's permanent strategic neutrality, the acceptance of limits on its own armed forces, and the renunciation of its aim to join Nato. This includes promising not to host any "foreign" military bases or weaponry. Underwriting this security guarantee are a group of hand-picked allies including the US, the UK, and Turkey.

But the long-term feasibility of the security guarantee remains unclear, as does what might happen to Ukrainian territories - both those seized by Russia in 2014 and then recognised by Putin before the invasion, and those occupied since the invasion began. Would Russia withdraw to where it was before the February invasion, or undertake only a limited withdrawal, maintaining troops in some key areas in eastern Ukraine?

Ukraine's political identity hangs in the balance. The west needs swiftly to consolidate Ukraine as a full sovereign member of the European family of nations, possibly within the EU itself, and to rebuild the country, piece by piece as necessary. This is a reasonable, if long-term, "win" for Ukraine and the west.

But Russia has committed vast resources to preventing precisely this outcome. Its plan is to either overpower Ukraine and bring it under Moscow's control, or destroy it in the process. Despite the enormous cost, the latter would still be seen as preventing a "loss" for Russia.

Both game theory and diplomacy require the perception of a "win" for all sides. But a win for Russia would be virtually impossible for Ukraine to accept, considering the unspeakable humanitarian losses it has suffered. It would also be deeply unjust, considering both the entirely unprovoked and unjustified manner of the Russian invasion, and the gratuitous conduct of its campaign since.

To achieve the goal of stopping the violence, the negotiations need to achieve a spectrum of wins and losses that, as one Russian source told the Financial Times newspaper, gives " every side" a win. That's hard to imagine at this point.

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How Will Ukraine-Russia Negotiations Go? Look to Game Theory for Answers. - EA WorldView

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Ukrainian and Russian negotiation teams meet in Homyel, Belarus, February 28, 2022 Zelenskiy is now calling for direct negotiations with the Russian President, Vladimir Putin. But the backdrop to the negotiations will be key. At home, Russia is increasingly paralyzed by sanctions designed to deepen its financial isolation and cause economic chaos.

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Game Theory/Prisoner's Dilemma - a Psychology View

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Game Theory/Prisoner's Dilemma - a Psychology View

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This article still continues to explain game theory and the Prisoner's Dilemma but does so through an everyday lens that we can all relate to.

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Imagine this: You and an acquaintance, let's call him Patrick, have the untoward idea of robbing a bank during broad daylight. To your chagrin, it doesn't work out and you both end up downtown. The officers have moved you into separate quarters and you are each being grilled intensely by detectives who seem to be straight out of an SVU episode. And yes, you're handcuffed and sitting in an austere room under a lightbulb.

The head detective comes in and does not mince words. If you want any chance of a light sentence, you'd better sing like a canary.

After an intensive grilling that is more stressful than anything you've ever experienced, it is clear to you that you have one of two choices. If you stay mum, you're going up the river for a long time-perhaps five years or more. If you rat out old Patrick, you'll definitely get a lighter sentence. And you may even be able to spin things in such a way that you get off with a stern talking-to and parole. To add to the intensity of the situation, you realize quite clearly that Patrick is in exactly the same boat.

So what do you do?

Prisoner's Dilemma and Game Theoretical Approaches to Behavior

The scenario painted here refers to a classic game used by game theorists to understand the math that underlies behavior. It is called, appropriately, Prisoner's Dilemma. ¹

In a game of Prisoner's Dilemma, the question is whether people are likely to show loyalty to their partner (Patrick, in this case) or if they are likely to betray their partner to advance their own self-interests.

This game, which became extremely topical after being highlighted in Richard Dawkins' game-changing book on evolution and behavior, The Selfish Gene ², can be used as something of a metaphor for understanding much of human social life. Nearly every day, we are faced with situations in which we have a choice to help someone else, at a cost to ourselves, or to not help and, thereby, advance our own self-interest.

In a prior post, I refer to this general dilemma as the fundamental human conflict, based largely on the work of renowned evolutionist David Sloan Wilson ³, who talks about humans as regularly encountering a combination of pressures to help out others versus pressures to act selfishly.

We run into this broader kind of situation all the time, in fact. Here are but a few kinds of examples that you might run into in everyday life:

You are in a rush at the grocery store and the person in front of you accidentally drops a whole bag of fresh apples on the floor.

It is Thanksgiving morning and you have plans to visit your brother and his family. Your brother calls you at 8am and asks if you can come early to help him rake leaves.

You and your best friend are both huge Taylor Swift fans. A mutual acquaintance texts you saying that she has one extra ticket to Taylor's concert at the Staples Center tomorrow night. She asks you to join. The show is sold out and there is no way that another ticket is going to materialize for your bestie.

You're a college student and you and your buddy, both underage, were drinking beers in the dorm. The RA heard a rumor about your shenanigans and questions you about your role, suggesting that one way or another, someone is going to get into trouble.

And so on.

Every day is full of situations where we have choices to make. And quite often, the choice pertains to whether we should act in a way that helps another at a cost to ourselves, or just go ahead and do what's in our own self-interest. In this way, life can be thought of a constant stream of Prisoner Dilemma kinds of situations.

Iterated versus One-Off Prisoner's Dilemma

Mathematically oriented behavioral scientists have used the simple Prisoner's Dilemma paradigm to explore all kinds of facets of human behavior. What would we expect people to do in this game? And what variables affect such behavioral decisions?

One critical factor that Dawkins ² talks about is this: Are you expecting to play this game with this same other person once? Or more than once?

In situations where the Prisoner's Dilemma decision is essentially a one-off, people typically, not very surprisingly, tend to act in their own selfish interests. If you're never going to see this person again, then there is little cost to simply going for broke at the other's expense.

However, if you are expecting to interact with this same other person into the future, then you might want to think twice. As an example, if you're playing Prisoner's Dilemma with Patrick from the example above, and you plan to play against him tomorrow and the next day and the next, etc., you might think hard about whether to simply betray him to get yourself a relatively light sentence on this particular occasion. After all, Patrick is unlikely to forget such a betrayal very quickly. And he may well bite back next time around, leading to adverse long-term outcomes for you.

So when it comes to Prisoner's Dilemma kinds of situations, in short, people tend to behave differently if they are playing a one-off round or if they are playing one round of many (with this latter scenario referred to as iterative Prisoner's Dilemma).

In one-off rounds of Prisoner's Dilemma, people are more likely to betray the other and act in their own self-interests. In iterative rounds of Prisoner's Dilemma, generally speaking, people are more likely to behave less selfishly. In short, an iterative Prisoner's Dilemma context tends to breed niceness while a one-off context tends to breed nastiness.

Prisoner's Dilemma, the Psychology of Strangers, and Evolutionary Mismatch

In life, sometimes, we interact with others whom we can fully expect to interact with again into the future. Such others might, for instance, include friends, relatives, and co-workers. In a sense, social interactions with such familiar others is akin to playing iterative Prisoner's Dilemma. And as discussed above, we tend to be nicer to others when playing iterative Prisoner's Dilemma compared with playing a round of one-off Prisoner's Dilemma.

From an evolutionary perspective, we can think about this issue in terms of evolutionary mismatch, or the tendency for modern conditions to differ dramatically from the ancestral conditions that surrounded our evolutionary history. ⁴

From the perspective of evolutionary mismatch, it is interesting to note that for the lion's share of human evolutionary history, our ancestors lived in small nomadic tribes and were constantly surrounded by kin and other familiar others. In terms of Prisoner's Dilemma, then, iterative Prisoner's Dilemma was really the only game in town. And remember, iterative Prisoner's Dilemma tends to foster cooperative, nice behavior.

But think about how things have changed, right!? These days, we interact with all kinds of people-many of whom are strangers. In fact, in any given day nowadays, we may interact with someone who uses a fake name and who lives across the world, such as sometimes happens when we call the customer service department of a large company. And think about this: When you are on hold with customer service and end up talking with someone whom you have never met and whom you likely will never see in your entire life, after waiting on hold for 90 minutes, are you always on your best behavior? I'm going to guess maybe not.

Now step back and think about just how normalized it is to interact with strangers in the modern world. I bet if you counted the instances in a typical day, you'll find that you may well interact with dozens of strangers on a daily basis. Each such interaction can be thought of as a case of one-off Prisoner's Dilemma. And remember that simple rule derived from game theoretical analyses of behavior? People are more likely to behave in their own selfish interests when playing one-off Prisoner's Dilemma compared with when playing iterative Prisoner's Dilemma. Think about that.

The Bottom Line

In a sense, a large proportion of social interactions can be thought of in terms of Prisoner's Dilemma, which pits our selfish interests against the motivation to cooperate with and help others. A simple rule of Prisoner's Dilemma is this: When we play against someone else in an iterated manner, expecting to have further interactions with that same person, we tend to be nicer than when we are playing against someone in a one-off capacity.

Interacting with strangers, which is now commonplace in so much of the human experience, can be thought of as playing one-off Prisoner's Dilemma. In modern conditions, we constantly find ourselves in situations, thus, that tend to inherently breed selfishness.

Want to understand why there is so much nastiness in the world today? Maybe the problem lies in the fact that so many human social interactions are between strangers who have no expectation of interacting with one another again. Perhaps this simple insight can help us create environments that are more conducive to helping, cooperation, and love.

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Imagine this: You and an acquaintance, let's call him Patrick, have the untoward idea of robbing a bank during broad daylight. To your chagrin, it doesn't work out and you both end up downtown. The officers have moved you into separate quarters and you are each being grilled intensely by detectives who seem to be straight out of an SVU episode.

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Ch. 18 focuses on strategic interaction, which is defined as the best choices that you make depends on  what others choose, and vice versa. The four steps to the strategic decision is:

1. Consider all possible outcomes - make a payoff table to show your choices and other people's choices to see all the consequences of each choice
2. Think about what-ifs separately - break the problem down by considering each scenario apart from each other to help you see your best choices
3. Play your best response - place a checkmark next to the best possible action for you to take, factoring in what other choices people make too
4. Put yourself in someone else's shoes - see what your opponent is thinking by repeating steps 1-3 as who your opponent is. This helps you see how they think and what you can do to better your decision

There are 4 situations where you can apply these 4 steps:

1. The Prisoner's Dilemma - when each player's outcomes depend on other players' decisions
2. The Coordination Games - when your choices need to complement other players' choices
3. The Games That Play Out Over Time - choosing strategic actions over a period of time when you either don't know other players' actions, and vice versa
4. The Infinitely Repeated Interaction - when you are require to keep interacting to your opponent's moves but you don't know for how long