The surprising power of game theory to explain irrational human behavior
Moshe Hoffman is a research fellow at the Max Planck Institute for Evolutionary Biology and a research fellow at the Sloan School of Management at MIT. Erez Yoeli is a research fellow at MIT’s Sloan School of Management, director of the MIT Applied Cooperation Team. They both teach at Harvard’s economics department.
Below, Moshe and Erez share 5 key insights from their new book, Hidden Games: The Surprising Power of Game Theory to Explain Irrational Human Behavior. Listen to the audio version – read by Moshe and Erez themselves – in the Next Big Idea app.
1. People are weird.
Just take our sense of aesthetics. In some places in the world, it is common for men to grow long nails, especially long pink nails. Now, for most of us, men with long nails aren’t that attractive, but when we asked men why they had long nails, they said it was because they thought they looked good. .
Here’s another example of our uncanny sense of aesthetics: rapper MF Doom’s intricate rhyme schemes. His complex verses pose two enigmas. First, there’s something funny about an entire art form growing around an artificial constraint like rhyme that actually makes communication quite difficult. Think how much harder it would be to tell a family member or friend how your day went if you had to rhyme almost every word with another word. Second, the rhymes of MF Doom are so subtle that the average listener might miss them. This begs the question: why is art so often subtle and valued for that subtlety?
Another thing that makes people weird is our sense of selflessness. You may know that Americans are very generous, donating around 3% of their GDP to charity each year. That’s as much as we spend on R&D. Yet when we give, we tend to do it in strange ways. In surveys, most people admit that they don’t even check the quality of a charity before donating. So why do we give – and why do we give so inefficiently?
2. Don’t give immediate explanations.
Immediate explanations are explanations that are based on what we think or feel. If you ask a fan of MF Doom why they love the rapper’s intricate rhyme schemes, the fan will likely say, “I like that beat” or “I like the way it sounded” or “I like the way that rhyme flowed over the bar.” That doesn’t explain Why they like these rhythms or rhyme patterns.
If you ask a charity volunteer why they wanted to support that particular organization, they might say, “It helps me feel connected” or “It helps build a global community.” But again, that doesn’t explain why it makes them feel connected, or why they care so much about building a global community.
“To understand why people are so weird, we need to go beyond proximity – and game theory helps us do that.”
To understand why people are so weird, we need to go beyond the near and game theory helps us do that.
3. Game theory is a powerful tool.
Basically, a game has only three parts. There are players who choose from certain actions and they get winnings. It’s that simple. To make this game theory, however, we need to add two more things. First, these winnings will not only depend on the player’s choice, but also on what others do. Secondly, you have to have the feeling that the players are making their choice in an optimal way. That’s it. That’s game theory in a nutshell.
Traditionally, game theory has been used to try to understand the behavior of companies (like, for example, when they merge, what might happen to prices), the behavior of bidders during an auction (how to change the rules could change their bids and the amount of revenue the auctioneer receives), or for statecraft (a famous application of game theory is nuclear tightrope politics).
Game theory can help us make sense of some counter-intuitive things. For example, you may have heard of the Dutch tulip mania of the 1600s. During that time, a single tulip bulb could cost hundreds of pounds of cheese. Yet, in some auctions, if no one bid high enough for the bulb, the auctioneer would simply crush it. It’s crazy! Why not just let the price drop further or try to resell it later? Game theory tells us that at least in some circumstances, destroying the light bulb can increase the expected revenue from the auction.
Game theory often yields strange results like this, giving it the power to explain all sorts of otherwise puzzling behavior. This is what makes game theory so powerful.
4. Game theory does not require rationality.
You may have read books like Richard Dawkins The selfish gene, which use game theory to explain a variety of puzzling animal behaviors and traits. Game theory has been used to explain why in some species the ratio of male to female at birth is 50 to 50. Then there’s the hawk-dove model, which people use to talk about animal territoriality. Or consider the expensive signaling pattern to talk about peacock tails – why would a creature develop such an absurd tail? It was a question that Darwin said made him sick because he couldn’t understand it.
“Another way to optimize is through cultural evolution – the idea that our tastes and beliefs are shaped by learning from experience or socially from others.”
Of course, these kinds of answers have nothing to do with rationality. All we need is for there to be some sort of optimization going on. And in those cases, biological evolution does that optimization.
Another way to optimize is through cultural evolution – the idea that our tastes and beliefs are shaped by experiential or social learning from others. This kind of argument has been used to explain why people in certain cultures develop a taste for spicy foods, or why Native Americans develop a taste for corn cooked with a little ash or lime, or why people start to believe in certain food taboos. that prevent them from ingesting dangerous toxins during pregnancy.
Game theory does not require rationality, just a process of optimization.
5. The game is often hidden.
Do you remember those men who grow long nails because they think long nails are beautiful? When we dug a little deeper, we found that those with long fingernails were secretaries, teachers, and mayors – people who worked on the inside. These were jobs that would allow you to both grow your nails long, but also have a little more prestige within the community. So one explanation here for long fingernails is that they signal something about people’s occupation. But this game was hidden.
What is the hidden game in altruism? Here the game might have more to do with reputations. We’re not saying that Habitat for Humanity volunteers sign up just so they can post photos on Instagram. They really want to do the right thing and feel really good swinging those hammers. But beneath the surface there is a hidden game that helps shape those right beliefs and right feelings. And this hidden game, if we take the time to understand it, can help us understand why the people who want to do the right thing are the same people who do it so inefficiently.
To listen to the audio version read by co-authors Moshe Hoffman and Erez Yoeli, download the Next Big Idea app today: