Trust: The Game Theory Hack

Game theory is highly applicable to many real-world situations. In short, without cooperation, parties in the game tend to choose an outcome that is not the best for them. What makes them choose the best scenario is cooperation, and that only happens if they trust each other. That’s why trust is so important to maximize outcomes for individuals, teams, organizations, and even nations. In this article, I will explain how this works and how, without trust, teams are condemned to suboptimal results. Because I’m sure 99% of you are not hardcore geeks like me, I broke down the article into a brief explanation of game theory first, and then the actual article. Enjoy!

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Game Theory 101

Game theory is a cool framework to understand how people, animals, computers, etc. make decisions when they're faced with choices. It is broadly used in many fields of knowledge, including politics, economics, business, evolution, logic, systems, and computer science, among others.

Traditionally, it was used to understand situations in which someone’s win was another’s loss (two-person, zero-sum games). But it evolved into a wider range of situations, notably after the thought experiment called “Prisoner’s Dilemma”.

The Prisoner’s Dilemma’s traditional setup involves the arrest of two gang members. Each one is put by the police in solitary confinement (so they are unable to communicate with each other). The problem is that the police don’t have enough evidence to convict them of a serious crime (e.g., an armed robbery) but they do have it to convict them of a lesser crime.

So, they offer each gang member, separately, a choice. If one testifies against the other, he will go free, but the other would get 3 years in prison. If both testify against each other, both would be sentenced to 2 years in prison. If neither testifies, they both get only 1 year in prison for the lesser charge. The choices are illustrated below.

Credit: CMG Lee.

So, clearly, both gangsters would be better off if they just stayed silent. But that is risky, since it could mean 3 years incarceration if one gangster rats the other out. If only they trusted each other to stay silent! Since trust is not guaranteed, both end up making a suboptimal choice, which is to rat each other out (both getting 2 years in prison).

(for the geeks out there, this is called a Nash equilibrium, from the brilliant John Nash, depicted in the 2001 movie “A Beautiful Mind”, with Russel Crowe playing Nash)

This traditional example has only two players and one iteration. This can be made even more interesting and surprising as you add more players, add more iterations, or tweak the situation. It also exemplifies how a lack of trust and cooperation generates a suboptimal outcome.

Now that you are “hooked” on game theory :), let's go to the main article.

Main Article

Even the simple Prisoner’s Dilemma can be applied to many real-life situations and help clarify some fascinating and baffling dynamics.

Let’s take global geopolitics as an example. Why do governments choose to spend so much of their budgets on weapons and on keeping a large military force, instead of using most of it to improve the country’s education, health, infrastructure, housing, etc.?? Clearly, having an educated and healthy population makes a country much better off. But if a country cannot defend itself from other militarized countries intent on conquering them, then a more basic need of their population, security, is not met, threatening any gains in health and education.

In the cold war, both the US and the USRR spent a huge amount of money on their nuclear ballistic missiles, to a number that could destroy the earth many times over. Why? Because matching the other’s military might keep each other in check, i.e., a deterrence.

Credit: Unlock Growth Strategic Advisory LLC.

Let's now consider multi-iterative games. The interesting aspect of a game with more than one round is that players can learn about the behavior of their opponents, and then decide how to change their answer in the following round.

In the eighties, renowned author Robert Axelrod ran experiments with game theorists, each submitting a different strategy for a tournament. The goal was to understand which strategy was the most effective in an iterative Prisoner’s Dilemma game.

Many strategies were submitted for the tournament. Some strategies held grudges (i.e., kept defecting indefinitely if the opponent defected, even if the opponent started collaborating in later rounds), others were sneaky (switched to defection even when opponent was firmly collaborating). One of the strategies even emulated the Golden Rule, something Christians know well as “turning the other cheek” (i.e., always collaborate, regardless of the opponent's actions). There was even a random strategy.

Surprisingly, the simplest program ended up winning, named Tit-for-Tat. It came from an even older concept, Hammurabi’s “an eye for an eye”. In this strategy, the player starts by cooperating, but matches what the opponent did in its last move.

Similar tournaments were also run, with evolving strategies to try to beat Tit-for-Tat. None really succeeded. The conclusion of the experiment was that the best strategies had 4 characteristics:

1) Be nice (i.e., collaborate first, and not the first to defect);

2) Be retaliatory (i.e., don’t be a pushover);

3) Be forgiving (i.e., retaliate, but not hold a grudge);

4) Be clear (i.e., don't overcomplicate). Simple strategies win because they allow the other players to predict the opponent’s moves.

All in all, reciprocal cooperation, and not unfettered competition, turned out to be the best strategy.? This conclusion has served as basis for many other studies, including why the instinct of cooperation survived and thrived in the evolution of human beings. ??

The exact same logic can be applied to teams, and ultimately, organizations. When team members trust each other, they invest more time in value-generating activities and find synergies in their work together, maximizing the output and quality of their teamwork – “One plus one equals more than two”. Alternatively, they might invest in redundant activities and political moves to protect themselves from similar actions from their peers – “Zero-sum game”.

While being retaliatory (without holding grudges) is key to survival, taking a leap of faith (being nice) and being consistent (being predictable) is key to building trust, which is the fuel to collaboration.

Leaders, you should take note of this. It is easier to establish a culture of trust if you use your position of power to take the first, positive step (be nice).? You should reward good behavior and performance, punish bad behavior, give second chances, and be consistent in your actions. You would be surprised at how quickly your team responds with growing trust in you. And that makes not only for an easier time for you as a leader, but also to a much more productive organization.