You Are Being Played Without Knowing It: How Game Theory Can Save You from Manipulation and Extra Expenses

Let's continue exploring mental tricks that will make you more effective and successful in life. Recently, I talked about survivorship bias—one of the most dangerous cognitive distortions that directly affects making the right decisions. Today, we will look at a concept that will help you take the most effective actions in various situations. We are going to talk about Game Theory.

What is Game Theory?

Contrary to its name, this science does not study chess, poker, or Monopoly. Game Theory is a mathematical method for studying optimal strategies in conflicts.

Here, a "game" refers to any situation where the outcome depends not only on your actions but also on the actions of other people (opponents or partners). When you decide what price to set for your product, what dishes to order at a restaurant while dining with friends, or how to haggle when buying a car—you are playing a game.

Who invented it?

The brilliant mathematician John von Neumann stood at the origins of Game Theory. In 1944, he wrote the book Theory of Games and Economic Behavior. Von Neumann loved poker and realized that this card game is an ideal model of life. After all, in poker, what matters is not just what cards you hold, but what your opponent thinks about your cards, and what you think they think about you.

However, von Neumann primarily described "zero-sum games" (where one person's win is always another's loss).

A real revolution was made by John Nash (the schizophrenic mathematician whose life inspired the movie A Beautiful Mind starring Russell Crowe). In 1950, Nash proved that in any game there is an equilibrium point where no participant wants to change their strategy because doing so would only make things worse for them. This was called the Nash Equilibrium. He received the Nobel Prize for this discovery.

Real-life examples: where does Game Theory work?

The Classic: "The Prisoner's Dilemma"

This is the most famous thought experiment. Imagine: you and your accomplice robbed a bank. You get caught, put in separate cells (you can't communicate), and each is offered a plea deal by the investigators.

• If you both stay silent, the police can't prove the robbery, and you both get just 1 year for hooliganism.
• If you rat out your accomplice and he stays silent, you go free, and he gets 10 years.
• If you rat each other out, you both get 5 years.

It would seem that the most profitable outcome is for both to stay silent (only 1 year each). But you sit in your cell and think: "What if he rats me out? Then I'll get 10 years! It's better if I rat him out first." Your accomplice is thinking the exact same thing. The result: You both betray each other and go to jail for 5 years. This is the Nash Equilibrium—a situation where people, acting rationally and selfishly, arrive at the worst possible outcome for everyone.

Why is Burger King always built next to McDonald's?

Have you noticed that competing pharmacies, coffee shops, or fast-food restaurants are often located right next door to each other? This is explained by Hotelling's model (a part of Game Theory).

Imagine a beach 1 kilometer long. People are sunbathing evenly across it. You and your competitor are selling ice cream. Ideally for the people: you set up at the 250-meter mark, and your competitor at the 750-meter mark. That way, no one has to walk far. But you want more money! You move toward the center (to the 400 m mark) to capture both the left edge and some of your competitor's customers. The competitor sees this and also moves to the center. As a result, you both stand nose-to-nose exactly at the 500-meter mark (in the center of the beach). You divide the customers exactly 50/50. But the poor people at the edges of the beach now have to walk half a kilometer for ice cream! It is profitable for a business to be close to its competitor, even if it is inconvenient for the customers.

Now let's look at more applied real-life cases that anyone can encounter.

The dirty mug in the office

Let's say you work in an office with a shared microwave and sink. If everyone washes their own dishes, everyone is happy. But washing dishes is tedious. If you wash up and your colleague doesn't, you end up looking like a fool (doing someone else's work). Since everyone is afraid of being the fool, no one washes the dishes. As a result, the sink turns into a mountain of dirty mugs. People rationally choose inaction, which leads to a disaster for the entire team.

The restaurant trap, or why we overpay in a group

You go to a restaurant with five friends. You agree in advance: "We'll split the bill evenly." It seems fair and convenient. But this is where Game Theory comes in (in economics, this is called the Unscrupulous Diner's Dilemma).

You look at the menu and think about ordering a light salad for 500 rubles. But then you realize: if Bob orders a steak for 2000, and Pete orders salmon for 1500, you will be paying for their expensive food because the bill will be split equally. And then a perfectly logical thought hits you: "Since I'm paying for everyone anyway, I might as well order a steak too!" Your friends are thinking the exact same thing.

As a result, everyone orders the most expensive dishes, which they would never have bought if they were dining alone. At the end of the evening, everyone gets a massive bill. Everyone spent more than they wanted to, but no one could have acted differently without ending up "in the red."

How to use Game Theory knowledge in life?

Knowledge of Game Theory is useless if you just sit there and understand how you've been backed into a corner. The main superpower of this science is the ability to change the rules of the game before you make your first move. Let's look at some practical strategies that will help you avoid traps, prevent yourself from being used, and maximize your benefits in business, relationships, and everyday life.

1. The "Tit-for-Tat" Strategy (for long-term relationships)

In the 1980s, political scientist Robert Axelrod held a computer program tournament to find out which strategy wins in an iterated Prisoner's Dilemma. The simplest program won—"Tit-for-Tat". Its algorithm is perfect for real life (partnerships, colleagues, neighbors):

• Step 1: Always start by cooperating (be kind and honest).
• Step 2: From then on, do exactly what your partner did in the previous step.
• Did they cheat you? Punish them immediately (respond firmly, refuse to help).
• Did they apologize and start cooperating again? Forgive them immediately and resume cooperation. Why it works: this strategy prevents people from taking advantage of you (you answer blow for blow), but it holds no grudges, which helps avoid an endless war of attrition.

2. Change the rules before the game starts

Suboptimal equilibrium (when everyone is badly off but no one can act differently) arises from bad rules. If you see that a rule is leading to disaster—break it right at the start.

• Let's return to the restaurant scenario. If you don't want to overpay for other people's steaks, say it before you even open the menu: "Guys, let's just pay for what we order today, because I'm only planning to get a salad." You break the "game" by moving it to a different format.
• In the office case, you can introduce an external system of fines or a cleaning schedule. Selfishness can only be defeated by the inevitability of punishment.

3. Forget about what is "already invested"

In business, investing, and toxic relationships, we often fall into the trap of escalation of commitment ("I've already spent a year on this project / I've already lost 100k at the casino, I need to win it back").

• In economics, there is the rule of Sunk costs. A rational player never considers what has already been spent. Evaluate the situation as if you just entered it today.
• Before entering any project (or argument), set a strict "stop-loss". "I will spend a maximum of 500,000 rubles on this startup. If it doesn't take off, I'm shutting it down, even if success seems right around the corner." Once you hit the limit, exit without emotion.

4. The principle of burning bridges

Sometimes the best way to win in Game Theory is to voluntarily deprive yourself of choices, and make sure your opponent sees it.

• A historical example: a commander lands on enemy shores and burns his ships. The soldiers understand there is no turning back—only victory or death. The enemy sees this too and gets scared by their fanaticism.
• Need to force yourself to stop eating sweets? Making a public bet for a large sum of money on social media deprives you of the choice.

5. Backward induction—think from the end

Never make the first move without thinking about the last one. Before making a decision (like starting a price war with a competitor), mentally play out the decision tree to the end:

1. I lower the price by 10%.
2. The competitor responds by lowering it by 15%.
3. I have to lower it by 20%.
4. We both go bankrupt, and only the buyer wins. Conclusion: The rational step is not to start a price war at all, but to compete, for example, on service quality (switch to a different game).

Remember the golden rule of Game Theory: your opponent is not an idiot. They are just as selfish, cunning, and rational as you are. Take their interests into account when planning your moves, and you will win 9 times out of 10.