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What is behavioral economics? Why does it matter to you?

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Podcast Episodes

What is behavioral economics? Why does it matter to you?

228. Game Theory: Behavioral Economics Foundations (Refreshed Episode)

Today’s episode is all about the fascinating world of game theory. This episode originally aired on August 23, 2019, and was episode 62 of the podcast. There are a couple of reasons I’ve selected this to be our refreshed episode this week. For one, with last Friday’s episode featuring Annie Duke talking about her new book Quit…you can’t think about Annie without thinking about poker, and game theory is so related to that. 

One of my favorite insights from game theory, which you’ll hear me talk about more during the episode, is the difference between playing to win and playing not to lose. As you will hear today, these two things may seem similar, but they are actually very different. And as you reflect upon the episode today (whether it is your first time or something you’re revisiting) consider your own life and work and let’s build upon the lessons from Friday’s episode with Annie about quitting, and how winners need to quit in order to win. Tip: understanding the rules and what it will take to win (so your emotions don’t get the better of you) will help you to win any game you are playing.

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HERE'S A 2 MINUTE TIP.

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SHOW NOTES:

  • [00:37] Today’s episode is all about the fascinating world of game theory. 
  • [01:46] You need to know when to be gritty and when to quit. 
  • [03:31] Humans aren’t rational. Humans don’t always make choices that are fully rational. We try to game the system or play the odds and choose routes that are not in our best interest – especially when we think someone may be treating us unfairly. 
  • [05:19] In behavioral game theory we need to consider how revenge, fairness, and personal gain all play to the outcomes. The 3 main games in game theory are the ultimatum game, the prisoner’s dilemma, and the dictator game.
  • [06:37] In purely rational economic terms it is best to keep the full $10 for yourself. There is no consequence for keeping it and no one will know. In reality, people would give away an average of $3. 
  • [08:19] You are playing the odds of being seen, feeling guilty, or whether or not that person will resent you. Whether or not you see each other or will see them again play a big part in your behavior. 
  • [10:18] History has a lot to play in the actions people take. Existing relationships help determine actions. 
  • [12:39] It is important to understand who has what power in each situation when you determine what to offer and think about how they might react. 
  • [14:0312] You can make an extra gesture (surprise & delight) to make a big impact. That first interaction lays a foundation for what people expect and how they feel about you in all your future interactions.
  • [15:58 It is important to understand all the options and variables before taking an action or making an offer.   
  • [17:02] In the prisoner’s dilemma, as a group they are better to both not say anything and take the one-year’s sentence. If they look at their individual personal gain or personal loss they are of course better off with no prison time motivating them to say something. 
  • [19:50] As it turns out, a tit-for-tat strategy consistently did best overall. In this way, you cooperate until someone deflects.  
  • [20:31] A quick response and a short memory was the best strategy.   
  • [21:19] In most real-life scenarios most of us are likely to choose to play fair until given a reason not to. 
  • [22:40] As much as we wish it would be, dealing with people is never black and white. There is so much gray impacting every situation and decision.  
  • [23:54] Always have written contracts and agreements. Document to ensure clarity. 
  • [26:23] Game theory is truly around us all of the time.  Pretty much any time you interact with another person, business, or entity game theory comes into play. We play the odds whether we realize it or not. 
  • [29:23] Companies used to be able to take advantage of customers much more if they wanted to. There wasn’t an easy mechanism for them to be punished. Often the punishment hurts much more than if you did the right thing in the first place.
  • [29:52] Melina shares a story about United playing the odds and losing big time. 
  • [32:17] When emotions take hold it can cause people to make bad decisions that they may regret in the long run so try and get some distance and perspective before acting especially if you feel really betrayed and angry.  
  • [33:19] When it comes to games many people are playing not to lose instead of playing to win. Winning is a long game.
  • [36:02] Winners quit a lot of stuff because they know what winning looks like. They know the rules, they know the game, and they can see what is helping them reach their goals and what is a hindrance.

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