Game Theory is Awesome

Have you ever heard of Game Theory?

The basic idea behind Game Theory is that if people act in their own best interests, they will reach a sub-optimal outcome vs. what could be achieved with cooperation.  This is called the "prisoner's dilemma," meaning that if all prisoners at a prison worked cooperatively, they could overwhelm the guards.  But if one of them "defected" and instead looked out for his bests interests by escaping, he as an individual would be better off.  The problem is that if everyone tries to "defect," there's nobody left to work cooperatively - hence, a dilemma.

One offshoot of game theory in the business world (and in politics, as you'll see) is describe as "threat power."  It's described very well here:

"Threat power is the ability of one player to damage another net of the other player's ability to damage him. If you don't care about your life (or your things, your family, convention, public opinion, etc.), you can sustain little damage, in utility terms. Any damage you can inflict is a threat power advantage.

Meaning, if you act just a little crazy, chances are you'll achieve a better outcome than you would if you act completely rationally.  Here's a political example of why it's so hard to combat terrorism:

That threat power advantage is the problem with terrorists. If terrorists cared about themselves, their neighbors, or their homeland and citizens, they really wouldn't be terrorists. Given some decent explosives, they can damage any democratic sovereign state far more than they can be damaged. Any progress towards their ends will inspire a never-ending chain of terrorism. It's all gain, and no loss, from the terrorist perspective."

Game theory affects our daily lives in really powerful ways, and understanding the role it plays in your life is important.