Sum Zero Folly – OCT 2022

Sum Zero Game Folly – Game Theory.

Have you ever watched two cars playing head-to-head chicken? The first to swerve loses the game. Let’s suppose that neither driver chickens out and both stay on a straight-line course. They both “win” by crashing into each other.
Consider two swimmers who are ferocious competitors. One starts taking drugs and the other follows. The drug taking leads to an identical improvement in performance. So, both “lose” as the end result is the same as when they were clean swimmers.

Another common win-lose scenario is parents fighting over custody of a child after divorce. Joint time previously enjoyed with the child must now be divided. The interests of the child are often overshadowed by parental bickering with the child as the “winning prize”.

Let’s up the ante and talk about warfare. Two superpowers are in an arms race. One develops a more destructive weapon and the other increases its arsenal accordingly. Yet if both countries co-operated, they could avoid a military build-up by signing an arms limitation agreement so everyone wins.

I could go on but I think you get the gist of the win-lose mentality (zero-sum game) of humans. The tendency of many people to focus on narrow self-interests in lieu of the best outcome for all parties led to the development of a branch of economics called game theory. This theory describes how the gain of one player is offset by the loss of another player, equalling the sum of zero.

The best-known example of game theory is the Prisoner’s Dilemma where two criminals are enticed by police to betray each other. The prisoner’s dilemma – to confess or not to confess – underscores how our choices affect others and how the choices others make affect us.

The Global Financial Crisis (GFC) was a modern-day prisoner’s dilemma where the “every-man-for-himself” attitude saw markets crash as everyone tried to get to the exit door first. All the efficiencies of the free market flew out the window as institutions hid their bad loans causing credit markets to freeze as players did not trust each other.

A less dramatic economic example is interest rates. Post GFC, lower rates become a zero-sum game for the economy as lower rates for borrowers (winners) translated into lower income for savers (losers). I believe that savers, particularly self-funded retirees, not borrowers, have been the main victims of the GFC.

The notion that someone has to lose for someone else to gain is narrow-minded. We humans must learn to modify this self-defeating attitude as zero-sum assumptions inevitably lead to conflict. Which is why game theory should be a compulsory element of the core curriculum of educational institutions.

We should all be taught that by changing the frame of negotiations from win-lose to win-win, both sides can benefit by working together on mutual outcomes. It’s called expanding the pie and a simple example taken from a book I read many years ago called, Getting to Yes, will help here.

The book advises parties entering negotiations to focus interests and not positions. It gives an example of two men in a library arguing over the position of a window. One wants the window open while the other wants the window closed – a seemingly win-lose scenario.

The librarian intervenes and asks both men what their underlying interest is in having the window either open or closed. One wants fresh air (so an open window) and the other wants no draft (so a closed window). Thinking creatively, the librarian then fully opens a window in the next room thereby bringing in fresh air without a draft and both men are happy.

Win-win solutions abound and school children and management graduates alike should be taught the benefits of co-operation over conflict and this training should begin in the home. After all, parents are the world’s first and foremost teachers. We can all play a part in making our planet a better place via collaborative decision making.

The 13 day Cuban missile crisis in 1962, played out between then U.S. President John F Kennedy and Soviet Leader Khrushchev when the world was brought to the brink of nuclear war was ultimately a win-win outcome. The impending disaster was avoided when the U.S. agreed to Khrushchev’s offer to remove the Cuban missiles in exchange for the U.S. promising not to invade Cuba. Kennedy also secretly agreed to remove U.S. missiles from Turkey. The world breathed a collective sigh of relief.

The message for business and business leaders is clear. Focus on interests and not positions in your negotiations. I guarantee if you do this you will exponentially increases the probability of ending up with a win-win outcome. Like all good things that are worthwhile, it will take time to retrain your mind to embrace game theory.

Remember no pain no gain!

John (JT) Thomas

This opinion piece is provided by John (JT) Thomas, a 46-year veteran of the financial services industry and since 1987 a specialist in commercial mortgage funds. Considered by many to be the father of the modern commercial mortgage fund sector, JT helped establish and then managed – for 17 years – what became the largest and most successful commercial mortgage fund in Australia – The Howard Mortgage Trust – with assets exceeding $3 billion. Under JT’s stewardship, investors never lost one cent of their investments and indeed, investors always received competitive monthly returns. JT was also Chair of the $40 billion mortgage trust industry sector working group.

JT has been proudly involved with Princeton for eight years and sits on both the Princeton Credit Committee and the Princeton Compliance Committee as well as being an advisor to the Princeton Board.