Game theory, dating & investments

My friend ran into an interesting dilemma on her last date.

Let’s call my friend X and her date Y.

X and Y met up for coffee. X felt hungry but Y was not. After a while, she was famished so she ordered something to munch on. When the bill came, Y gave no indication of paying. So X reached into her wallet to produce her credit card. The cafeteria told her that they did not accept cards. She barely had sufficient cash. As a result, Y had to hand out the dough.

Here is her take on the incident.

The first time they went out, Y paid.

The second time, when X offered to pay, Y obligingly passed the bill to her.

This time he was not too eager to settle it, probably on the presumption that she was the one who was famished and placed the order so it was her responsibility.

Besides feeling a bit embarrassed at not having money, she was perplexed: “Has he now assumed that I will be the bankrolling most of our dates”?

I am not taking sides here but I don’t blame him. A significant part of his young adult life has been lived in the shadow of a recession. Secondly, he does not know if the girl is stringing him along so is obviously playing it safe by not being fiscally macho. Unless you are a hippie of some sort, money is a big deal and nothing screams “loser” louder than the realization (in the “post-getting dumped” scenario) that all the reckless spending in the early days of the relationship amounted to nothing but a busted ego and a lighter wallet.  

Neither do I belittle my friend’s concern since the same logic holds true for her too.

If you have ever dated, you would have certainly encountered such situations which have all the potential to ruin a relationship. Don’t scoff! Researchers like David Buss (author of The Evolution of Desire), believe that the human brain and cognition evolved as a consequence of problems posed by complex social relationships. Which probably means that the human brain has reached its current size mostly to figure out such social dynamics (did you know that we have bigger brains than most animals?). Maybe we could learn a lesson or two from elephants and whales since their brains are bigger than ours.

So how should the next date play out? Should he pay the bill? Should she reach out for the bill? Should they alternate paying for it? Should they split it everytime? Should she bring up her concern?

Let’s see what game theory has to say. Game theory can be applied to anything: international diplomacy, war, love, dating, evolution or business strategy. A report in the New York Times claims that it can even be applied to whether or not you should wait for the bus.

According to this theory, a game is any situation in which one player makes a decision that affects the other (let’s restrict it to two players). So, even though X and Y are just dating and not playing games, by the definition of this theory they unconsciously are. The game begins with one player making a choice (a move) resulting in a situation the other reacts to (resulting in another move). So their social interactions over time are just a combination and culmination of many games (goodness, economists are really so unromantic!).

The essence of the theory is that the action of each of the rational adversaries would depend on what the other side was likely to do. But real life scenarios are much more complicated than a mathematical model. It also involves understanding your opponent in the game. If you think he is rational but he is not, then your moves could backfire.

In game theory, you cannot master the game because it is not technicalities at play here.  

You cannot ask: What is the best way to date?

Instead, go with: Is there a better way to date in this situation?

In my friend’s case, the best way to tackle the situation would not be to play the game with the idea of beating the opponent but to just do well for herself. Since they both enjoy each other’s company, the best outcome would be one that comes out of a cooperative stance.

In that case, she can immediately suggest at the next date that they go dutch.

Or, she could just wait for him to pick up the tab.

Or, she could go along with the flow. If he does not pick up the bill and she finds herself footing the bill most of the time, she can either suggest at that time they go dutch or tell him that she finds it unfair. His move will then determine the direction the relationship will take.

A cooperative strategy (as against a non-cooperative one in game theory) would help them both reach a reasonable solution.

Paula Szuchman, author of a book on relationships and game theory, says that if game theory teaches us anything, it’s that relationships are not about having it all. It is about achieving the best possible result under the circumstances. Well said Paula!

If such relationships are based on the cooperative strategy, some will benefit from the non-cooperative one. Professor Kenneth Binmore, who researches game theory, was widely known for his role in designing the UK 3G Spectrum Auction, which was rumored to be based on game theory. Auctions are a sort of game with rules of the game, allocation rules and bidder strategies. The aim is to sell an object to bidders whose valuations are unknown to sellers and other bidders. The auction outcome is then determined via a non-cooperative game played by bidders under rules determined by their beliefs about the good’s valuation and/or signals from other bidders.

In the case of investments, game theory principles can be enlightening. When you decide to buy a stock, many players come into the picture immediately. If banks hike up their interest rates, the company that you invested in may find itself steeped in too much debt. If a competitor enters the market and the company loses market share, profits will be hit. This will result in analysts downgrading the stock resulting in the price falling.

You cannot play the market and expect a “guaranteed” win because there are too many players in this game. And not all players have the same level of information or the ability to interpret it accurately.

Of course, a stock trader could make an assumption that given a particular amount of volatility or level of the Sensex (or any other index), one strategy would be preferred over the other. But then you have situations like the Kobe earthquake of 1995, the Asian financial crisis of 1997, the Russian bond default of 1998, the 9/11 terrorist attack in New York in 2001, the credit crisis of 2008, the ongoing Euro drama and the entire game can be overturned by such external factors. So it's not just the uncertainty due to actions of the other players, there is also uncertainty due to randomness.

But one way or the other, game theory touches all of our lives. :)

Disclaimer: I am NOT an expert on game theory and my knowledge on the subject is woefully stunted. If I have erred, I am dreadfully sorry... :(