Game Theory Loses

Recent experiments in game theory, and specifically the finding that so many people do not behave in the way that game theory says that they “should,” shed light on the failures of economic theories, including the whole idea of the “market.”

In both academic game theory and the common idea of the economic market, people are imagined as motivated by only one goal, increasing their wealth. And they are imagined as viewing all others as competitors and rivals with the same obsession.

In a Feb. 27 New York Times article, Virginia Postrel described a couple of failed experiments. In the first, Person 1 has $10 and can give any dollar amount to Person 2. If Person 2 accepts it, they both keep the money. If Person 2 rejects it, neither gets anything. Both people know these rules. According to game theory, “Player 1” (the people are called players) should offer only $1 and “Player 2” should take it. In reality, half the people act “irrationally.” Person 1 in many cases offers nearly half the money. Person 2 in many cases rejects smaller offers, leaving both people with nothing.

In the second failed experiment, each person is given $10. Person 1 is given an additional $10. Person 1 can then give any dollar amount to Person 2. Whatever she or he gives is tripled. Person 2 can then give some back. Most Person 1s give about half their money. Most Person 2s give some back. This result suggests that trust and gratitude and other such messiness has corrupted the pure competition in which “rational” players don’t give money away.

A professor quoted in the New York Times article described trust as something people are not consciously aware of, but as something that influences their decision making through the hormone oxytocin in a way similar to that found in “lower mammals.” The assumption that some mammals are “lower” than others was not elaborated. The bizarre idea that people are not aware of their feelings of trust, distrust, and desire to trust was not questioned or defended. The implication that thought processes are “lower” and “unconscious” because you happen to have identified their physical components was apparently presumed to be indisputable, whereas I find it nonsensical unless one clings to the belief that “higher” thinking is done by an immaterial soul. But, most importantly, trust was degraded in this comment in comparison with calculated greed. The game theorists don’t see their theories as failing; they see real people as failing to measure up to the imaginary participants in their theories.

Do the people who refuse to behave as game theorists expect suffer as a result, or do they actually come out ahead in terms of dollars acquired? No doubt, some of each. But if we ask that question, we are still playing game theory. We are suggesting that additional research be expended on developing a better game theory that incorporates additional motivations. That course is, I think, likely to prove destructive. As long as game theory endures as a discipline, it will encourage us to think of life as a competitive game. There are things that I would give my life, and much more so all of my possessions, for. Fit that fact into a game theory, and it ceases to be game theory.

What’s wrong with thinking of life as a competition? Well, try to do so consistently, and see which you get called first, a perfect rational market player or a psychopath. We hear a lot about government interference in the “Market.” But a total market would be an interference in the way most of us choose to behave.

Half the time, of course, we think that we do want a market. Ironically, our idealization of a market leads to acceptance of nonmarket abuses, also known as corporate welfare, by the apparent winners in the market. Since greed is the highest good, it is seen as admirable to take advantage of a government in the name of private greed.

But we don’t fully accept the idea of free market anarchy. If we did, there would be no government to provide welfare to the wealthy. The vast majority of us, according to polls, would like to see value restored to the minimum wage, would like to see the right to organize unions protected, would like stiffer health, safety, and environmental protections, and favor various other nonmarket practices. In doing so, we are acting uncompetitively, unindividualistically. We are acting out of feelings of fairness, disgust, trust, generosity, solidarity, fear, and endlessly more. These feelings or thoughts are in no way more lower-mammalian than the feeling of complete and unquenchable greed. And they have the advantage of actually existing.

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