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10 Hidden Laws of Game Theory That Control Your Life

Nash Equilibrium (1949)

This concept, introduced by John Nash, states that a stable state can occur where each player makes the best choice given the actions of the others. In everyday life, we often try to find Nash Equilibrium in competitive situations like negotiations or strategic decision-making.

Here are some more examples:

  1. Price War:
    • Companies A and B are competing in the same market for a consumer electronics product.
    • The equilibrium price for this product is $100, but if one company lowers its price, the other company will also lower its price to stay competitive.
    • In this situation, the Nash Equilibrium occurs when both companies set their prices at $90.

Example: Suppose Company A lowers its price to $80. Then Company B will lower its price to $85. If Company B lowers its price to $80 (matching Company A), it will have lost a significant portion of its profit margins. Therefore, the Nash Equilibrium price for both companies is $90.

  1. Traffic Lights and Commuting:
    • Drivers traveling in opposite directions on a busy road have two options: to speed or to obey traffic signals.
    • The Nash Equilibrium in this situation occurs when both drivers choose the strategy that maximizes their individual travel time, given the choices of the other driver.
    • Assuming drivers have different speeds, the equilibrium will be reached when each driver chooses to speed at times when they anticipate the other driver will also speed.

Example: Let’s say Driver A decides to speed when the other driver (driver B) is likely to speed. Then driver B will anticipate that driver A will speed and also decide to speed themselves. This results in a traffic jam, illustrating the Nash Equilibrium where both drivers are worse off.

  1. Negotiations and Salary Increases:
    • Employee A is negotiating a salary with their prospective employer, and Employee B has also applied for the same position.
    • If Employee A asks for a higher salary, the employer may offer a lower salary as an alternative for Employee B.
    • The Nash Equilibrium occurs when the employer offers the second-highest salary it wants to pay, which happens when Employee A requests a higher salary and Employee B has also requested a higher salary.

Example: Suppose the highest salary the employer is willing to pay is $60,000. If Employee A requests $70,000 and Employee B requests $65,000, the Nash Equilibrium will be the second-highest salary, which is $60,000.

  1. The Arms Race and Military Build-up:
    • Two countries (Country A and Country B) are competing to build up their military forces.
    • If Country A builds up its military forces, Country B may feel compelled to do the same, creating a cycle of buildup.

Example: Let’s say Country A decides to invest more in its military. Then Country B may feel that a stronger military of its own is necessary to balance Country A. As Country A increases its military investment, Country B may decide to do the same and so on.

  1. Auction Strategy:
    • Three friends (John, Jane, and Jack) are bidding for a rare collectible.
    • Each friend wants to bid as little as possible but still win the auction.
    • The Nash Equilibrium occurs when the friend with the highest value for the collectible bids the lowest amount, followed by the next highest valued friend, and so on.

Example: Suppose the collectible is worth $100 to John, $90 to Jane, and $80 to Jack. In this case, John will bid $1, Jane will bid $10, and Jack will bid $20. The Nash Equilibrium is achieved when the friend with the highest value bids the lowest amount.

Zero-Sum Games (1897)

James Waldegrave introduced the concept of zero-sum games, where one player’s gain equals the other player’s loss. Many business and economic interactions can be framed as zero-sum games, where profits are maximized by taking advantage of competitors.

Here are some examples:

  1. Competition in Oligopoly:
    • Three companies (A, B, and C) are competing in the same market for a consumer electronics product.
    • The objective of each company is to gain market share at the expense of the other two companies.

Example: Suppose Companies A and B have a strong relationship and often compete with Company C. If Company A and B agree to reduce their prices to $90 and $80, respectively, Company C will feel compelled to do the same or go out of business.

  1. Election Politics:
    • Three parties (A, B, and C) are competing for the presidency in a country.
    • Each party wants to win the election at the expense of the other two parties.

Example: Suppose Party A has a strong coalition with Party B, but Party C is a powerful outsider. In this case, Party A and B might form an alliance to defeat Party C.

  1. Business Expansion:
    • Two companies (X and Y) are expanding their market share in the same industry.
    • Each company wants to expand its market share at the expense of the other company.

Example: Suppose Company X is expanding into a new market. If Company X is successful, it might reduce the market share of Company Y, leading to a power struggle between the two companies.

  1. War Strategies:
    • Two countries (A and B) are engaging in a war.
    • Each country wants to defeat the other country.

Example: Suppose Country A has a strong military, but Country B has a skilled intelligence service. In this case, Country A might engage in a military buildup, but Country B might choose to sabotage Country A’s plans.

Prisoner’s Dilemma (1950)

This thought experiment illustrates how individuals acting in their own self-interest can lead to suboptimal outcomes for all parties involved. In personal relationships, it can be tempting to act in one’s own self-interest, even if it may damage the relationship.

Here are some examples:

  1. Corporate Espionage:
    • Two companies (A and B) are competing in the same market for a consumer electronics product.
    • Each company might engage in espionage to gain a competitive advantage.

Example: Suppose Company A discovers a trade secret belonging to Company B. If Company A chooses to reveal the secret, it will face a prison sentence of 2 years. If Company B chooses not to reveal the secret, Company A will face a prison sentence of 3 years. If both companies choose to reveal the secret, they will each face a prison sentence of 1 year. If neither company reveals the secret, they will each face a prison sentence of 0 years.

  1. International Negotiations:
    • Two countries (A and B) are negotiating a peace treaty.
    • Each country might choose to cooperate or defect from the treaty.

Example: Suppose Country A offers a concession to Country B, but Country B declines the offer. If Country A chooses to renege on the concession, Country B might retaliate by withdrawing from the treaty.

  1. Business Partnerships:
    • Two business partners (A and B) are forming a joint venture.
    • Each partner might choose to cooperate or defect from the agreement.

Example: Suppose Partner A invests $1 million in a joint venture with Partner B. If Partner B fails to return the investment, Partner A might choose to withdraw from the agreement.

  1. Personal Relationships:
    • Two individuals (A and B) are having a relationship.
    • Each individual might choose to cooperate or defect from the relationship.

Example: Suppose A and B are married and have a child. If A chooses to have an affair, B might choose to leave the relationship.

Coordination Problem (1970)

This concept highlights the challenges and inefficiencies that occur when multiple individuals or groups need to agree on a course of action. It’s crucial in everyday life, especially when interacting with others, to be aware of coordination problems.

Here are some examples:

  1. Traffic Flow:
    • Drivers traveling in opposite directions on a busy road need to coordinate their speed.
    • Each driver might choose to speed or obey traffic signals.

Example: Suppose drivers A and B are traveling in opposite directions on a busy road. If driver A chooses to speed, driver B might choose to speed as well, causing a traffic jam.

  1. Election Strategies:
    • Two candidates (A and B) are running in an election.
    • Each candidate might choose to run a positive or negative campaign.

Example: Suppose Candidate A runs a positive campaign, but Candidate B runs a negative campaign. If Candidate A chooses to respond negatively to Candidate B’s campaign, it might create a back-and-forth cycle of negative campaigning.

  1. Business Partnerships:
    • Two business partners (A and B) are forming a joint venture.
    • Each partner might choose to cooperate or defect from the agreement.

Example: Suppose Partner A invests $1 million in a joint venture with Partner B. If Partner B fails to return the investment, Partner A might choose to withdraw from the agreement.

  1. Personal Relationships:
    • Two individuals (A and B) are having a relationship.
    • Each individual might choose to cooperate or defect from the relationship.

Example: Suppose A and B are married and have a child. If A chooses to have an affair, B might choose to leave the relationship.

Evolutionary Stable Strategy (1964)

This concept involves finding strategies that are robust to mutation and other forms of change, in the context of the prisoner’s dilemma. We often adapt and change behaviors in personal interactions, trying to find an optimal mix between self-interest and cooperation.

Here are some examples:

  1. Animal Behavior:
    • A species of birds (A) is competing with another species (B) for food.
    • Each species might choose to cooperate or defect from the competition.

Example: Suppose species A chooses to cooperate with species B by warning it of predators. Species B might respond by cooperating with species A. Over time, both species might evolve to cooperate with each other, leading to a stable strategy.

  1. Competition and Innovation:
    • Two companies (A and B) are competing in the same market for a consumer electronics product.
    • Each company might choose to innovate or adopt existing technology.

Example: Suppose Company A chooses to innovate and develop a new product, while Company B chooses to adopt existing technology. If Company A’s innovation is successful, Company B might choose to adopt the new technology, leading to a stable strategy.

  1. Game Theory and Sports:
    • Two teams (A and B) are competing in a game.
    • Each team might choose to cooperate or defect from the game plan.

Example: Suppose Team A is playing Team B in a basketball game. If Team A chooses to play aggressively, Team B might respond by playing defensively. Over time, both teams might evolve to follow the same game plan, leading to a stable strategy.

  1. Politics and Elections:
    • Two candidates (A and B) are running in an election.
    • Each candidate might choose to cooperate or defect from the campaign.

Example: Suppose Candidate A chooses to cooperate with Candidate B by offering a bipartisan platform. Candidate B might respond by cooperates with Candidate A, leading to a stable strategy.

Freming’s Power Law (1982)

Power law suggests that, as the number of participants (N) in a game increases, the expected payoff decreases, according to 1/N. It’s crucial to keep in mind the number of actors and their expected payoffs when engaging in complex transactions.

Here are some examples:

  1. Social Network Analysis:
    • A social network has N nodes and M edges.
    • Each node might choose to cooperate or defect from the network.

Example: Suppose a social network has 10 nodes and 20 edges. If the network follows Freemins’ Power Law, it will be easier for smaller groups to coordinate their action than for the entire network to coordinate.

  1. Economic Systems:
    • An economic system has N agents and M transactions.
    • Each agent might choose to cooperate or defect from the system.

Example: Suppose an economic system has 100 agents and 200 transactions. If the system follows Freemins’ Power Law, it will be easier for smaller groups to coordinate their action than for the entire system to coordinate.

  1. Game Theory and Strategy:
    • A game has N players and M strategies.
    • Each player might choose to cooperate or defect from the game plan.

Example: Suppose a game has 10 players and 10 strategies. If the game follows Freemins’ Power Law, it will be easier for smaller groups to coordinate their action than for the entire group to coordinate.

  1. Politics and Elections:
    • Two candidates (A and B) are running in an election.
    • Each candidate might choose to cooperate or defect from the campaign.

Example: Suppose Candidate A chooses to cooperate with Candidate B by offering a bipartisan platform. Candidate B might respond by cooperating with Candidate A, leading to a stable strategy.

Tragedy of the Commons (1968)

This concept, developed by Garrett hardin, discusses how shared resources (the ‘commons’) can be over-exploited by individual self-interest. This principle is applicable to situations where resources are shared among multiple parties, often resulting in a breakdown in social order.

Here are some examples:

  1. Overfishing:
    • A group of fishermen (A, B, and C) are fishing in a common resource (the ocean).
    • Each fisherman might choose to fish as much as possible.

Example: Suppose the ocean can only sustain 100 fish per day. If each fisherman chooses to fish 100 fish per day, the ocean will be depleted quickly, leading to a tragedy of the commons.

  1. Environmental Degradation:
    • A group of individuals (A, B, and C) are contributing to environmental degradation by releasing pollutants into the air or water.
    • Each individual might choose to release as much as possible.

Example: Suppose a factory is releasing pollutants into the air. If each factory chooses to release as much as possible, the air will become increasingly polluted, leading to a tragedy of the commons.

  1. Public Goods and Services:
    • A group of individuals (A, B, and C) are receiving a public good or service (e.g. a public park).
    • Each individual might choose to use the resource as much as possible.

Example: Suppose a public park is maintained by taxpayers. If each taxpayer chooses to use the park as much as possible, the park will become overutilized and degraded, leading to a tragedy of the commons.

  1. Government Debt:
    • A group of individuals (A, B, and C) are contributing to government debt by borrowing money.
    • Each individual might choose to borrow as much as possible.

Example: Suppose a government borrows money to finance its expenses. If each individual chooses to borrow as much as possible, the government debt will increase rapidly, leading to a tragedy of the commons.

Governing Body Principle (1906)

This principle states that in a situation of complete information, the individual’s payoff will never decrease when a third-party (or governing body) intervenes and alters individual payoffs to ensure their own benefit. It explains how external governance can sometimes be necessary to stabilize and optimize social interactions.

Here are some examples:

  1. Business Organizations:
    • A business organization (e.g. a corporation) has a governing body (the board of directors) that makes decisions for the company.
    • The governing body might choose to cooperate or defect from the company’s mission.

Example: Suppose the board of directors of a company chooses to cooperate with the company’s mission by investing in research and development.

  1. Government Agencies:
    • A government agency (e.g. the FDA) has a governing body (the agency’s directors) that makes decisions for the agency.
    • The governing body might choose to cooperate or defect from the agency’s mission.

Example: Suppose the directors of the FDA choose to cooperate with the agency’s mission by regulating food safety.

  1. Non-Profit Organizations:
    • A non-profit organization (e.g. a charity) has a governing body (the board of directors) that makes decisions for the organization.
    • The governing body might choose to cooperate or defect from the organization’s mission.

Example: Suppose the board of directors of a charity chooses to cooperate with the organization’s mission by providing aid to those in need.

  1. Community Organizations:
    • A community organization (e.g. a neighborhood association) has a governing body (the association’s directors) that makes decisions for the organization.
    • The governing body might choose to cooperate or defect from the organization’s mission.

Example: Suppose the directors of a neighborhood association choose to cooperate with the organization’s mission by improving the neighborhood’s infrastructure.

Nonzero-Sum Games (1918)

In contrast to zero-sum games, nonzero games involve both players experiencing gains and losses. When framing problems as nonzero-sum games, new and innovative strategies and collaborations can emerge. This concept can be applied when thinking about win-win situations in business, politics, or personal relationships. Here are some examples:

  1. Business Partnerships:
    • Two business partners (A and B) are forming a joint venture.
    • Each partner might choose to cooperate or defect from the agreement.

Example: Suppose Partner A invests $1 million in a joint venture with Partner B. If Partner A chooses to cooperate, Partner B might choose to cooperate as well, leading to a nonzero-sum game.

  1. Personal Relationships:
    • Two individuals (A and B) are having a relationship.
    • Each individual might choose to cooperate or defect from the relationship.

Example: Suppose A and B are married and have a child. If A chooses to cooperate with B, B might choose to cooperate as well, leading to a nonzero-sum game.

  1. Election Strategies:
    • Two candidates (A and B) are running in an election.
    • Each candidate might choose to cooperate or defect from the campaign.

Example: Suppose Candidate A chooses to cooperate with Candidate B by offering a bipartisan platform. Candidate B might respond by cooperating with Candidate A, leading to a nonzero-sum game.

  1. Business Expansion:
    • Two companies (A and B) are expanding their market share in the same industry.
    • Each company might choose to cooperate or defect from the expansion.

Example: Suppose Company A chooses to expand its market share by investing in new products. If Company B chooses to cooperate by investing in the same products, Company A and B might be able to achieve greater success than if they had not cooperated.

Homo Ludens (1958)

This concept describes how play and competition in human culture drive innovation and creativity. By fostering this aspect of human nature, we can encourage progress and cooperation, leading to mutually beneficial outcomes.

Here are some examples:

  1. Game Theory and Sports:
    • Two teams (A and B) are competing in a game.
    • Each team might choose to cooperate or defect from the game plan.

Example: Suppose Team A is playing Team B in a basketball game. If Team A chooses to play aggressively, Team B might respond by playing defensively. If Team B chooses to cooperate by playing defensively, Team A might choose to cooperate by playing offense.

  1. Politics and Elections:
    • Two candidates (A and B) are running in an election.
    • Each candidate might choose to cooperate or defect from the campaign.

Example: Suppose Candidate A chooses to cooperate with Candidate B by offering a bipartisan platform. Candidate B might respond by cooperating with Candidate A, leading to a nonzero-sum game.

  1. Business Partnerships:
    • Two business partners (A and B) are forming a joint venture.
    • Each partner might choose to cooperate or defect from the agreement.

Example: Suppose Partner A invests $1 million in a joint venture with Partner B. If Partner A chooses to cooperate, Partner B might choose to cooperate as well, leading to a nonzero-sum game.

  1. Personal Relationships:
    • Two individuals (A and B) are having a relationship.
    • Each individual might choose to cooperate or defect from the relationship.

Example: Suppose A and B are married and have a child. If A chooses to cooperate with B, B might choose to cooperate as well, leading to a nonzero-sum game.

January 21, 2026 ∙