How game theory explains ‘irrational’ behavior

Game theory is often used to explain how rational people navigate tense negotiations and high-stakes decisions. But what does it have to do with unconscious human behavior, like what wines people enjoy or why they donate to certain charities?

In their new book “Hidden Games: The Surprising Power of Game Theory to Explain Irrational Behavior,” MIT Sloan research associate Erez Yoeli and research fellow Moshe Hoffman explore the less obvious ways game theory explains human behavior, from the ways athletes and scientists develop and pursue passions to why people enjoy certain pieces of art, eat certain foods, or donate to GoFundMe campaigns instead of high-impact charities.

Yoeli is a lecturer at Harvard University and the director of the Applied Cooperation Team at MIT, where he studies altruism and how to encourage people to adopt better behavior.  Hoffman is a research fellow at Max Planck Institute for Evolutionary Biology and a lecturer at Harvard University. He studies the motives that shape social behavior, preferences, and ideologies. 

Yoeli and Hoffman argue that people are bad at optimizing when they rely on their conscious minds to do so. But when people unconsciously rely on learned tastes and beliefs, they behave more optimally. The authors apply their argument, with mathematical models, to explain everything from why people like expensive watches to sex ratios in animals.

In the following excerpt, Yoeli and Hoffman explain how they use game theory to answer puzzling quirks of human and animal behavior.

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What tricks do cable news networks use to misinform? Why does motivated reasoning work the way it does? Internalized racism? Why is modesty a virtue? Where does our sense of right come from? Why couldn’t the Hatfields and McCoys bury their hatchets?

In short: Why are human preferences and ideologies the way they are? Why do they work the way they do?

People tend to respond to questions like these with proximate answers, for example: Tannic wines are exceptional because they are more interesting. People develop a passion for crafts because they find it satisfying to work on discrete projects with a finite timeline, where they can quickly see the end results, or they develop a passion for research because they like the freedom to engage in long, detailed explorations of a particular topic and really become experts in it. We give out of empathy for the recipient and do so ineffectively because empathy itself is a blunt tool that’s not so sensitive to efficacy.

While such responses are often interesting, helpful, and valid, they aren’t really answers, at least not in the sense we will be looking for in this book. Sure, tannic wines are more interesting, but what counts as interesting? And why do we even care if they’re interesting? Sure, some people develop a passion only when they quickly see the results of their handiwork while others only get excited by longer, in-depth projects, but we’re still left wondering why some are drawn in one direction while others are drawn in the opposite one, as well as why anyone develops any passion at all. Sure, empathy is a blunt tool, but why? Each of these answers raises at least as many questions as we started with!

We will, instead, attempt to give answers that are, in some sense, more ultimate. In doing so, the key tool we will be using is, of course, game theory.

Game theory is a mathematical tool kit designed to help us figure out how people, firms, countries, and so on will behave in interactive settings — when it matters not only what they do but also what others do. The tool kit has been successfully deployed to help firms design and bid in auctions (where how each bidder should bid depends on others’ bids). It is also a cornerstone of federal antitrust regulation.

At the Federal Trade Commission and U.S. Department of Justice, armies of economists spend their days evaluating proposed mergers and acquisitions with the help of a game theory model called Cournot competition (which helps them predict how prices will change, taking into account that all firms in the market will react to what the merged firm does and vice versa). A few blocks away, at the U.S. Department of State, game theory has influenced the thinking of generations of diplomats. For instance, the United States’ cold war strategy of mutual destruction and nuclear brinksmanship was reinforced by the game-theoretic analyses of Thomas Schelling (which took into account that the number of nukes the U.S. should make depended on the number that the USSR had and vice versa).

People aren’t trying to optimize when they become passionate about playing chess, develop new art movements, or give to charity. They do these things based on intuition or feel or . . . it just kinda happens without them even realizing it at all. That sounds nothing like the cold-hearted calculus involved in boardroom and situation-room decision-making.

Moreover, you might also be thinking that game theory traditionally rests on a key assumption that’s, well, let’s say questionable: the assumption that people behave optimally. That we are rational. That we have all the relevant information and use it as a computer might to maximize its benefits — doing complex calculations in the process. Maybe this assumption is decent for the crew in the boardroom, strategizing over their radio spectrum bid, but for the rest of us going about our day-to-day lives? There have been not one but two Nobel Prizes in economics for emphatically knocking that assumption down (Daniel Kahneman’s in 2002 and Richard Thaler’s in 2017).

Even some of our motivating puzzles — willingly dying for a cause, giving to ineffective charities when effective ones stand at the ready — seem to be strong evidence in Danny and Dick’s favor.

We are going to use these two arguments to cancel each other out. Yes, people are quite often quite bad at optimizing when they are relying on their conscious minds to do the optimization. But when they are not consciously optimizing, and it is learning and evolution doing the optimization — as we will argue is often the case for tastes and beliefs — things start to look a lot more promising.

When it comes to evolution, the logic is likely already familiar. People’s tastes evolved to motivate us to act in ways that benefit us. We evolved a taste for fatty, salty, and sweet foods because that motivated us to seek out foods high in fat, salt, and calories in an environment where these were rare. We evolved an attraction to symmetrical faces, chiseled jaws, and broad hips because this motivated us to seek partners who were more healthy, successful, and fertile.

But it’s not like rap fans evolved from caveman ancestors who sat around the fire trading rhymes while modern art fans’ ancestors devoted their leisure time to abstract cave painting (“Ceci n’est pas une mammoth laineux”). Most of the tastes and beliefs we’re interested in aren’t biologically ingrained in us. They’re learned.

Excerpted from "Hidden Games: The Surprising Power of Game Theory to Explain Irrational Human Behavior" by Moshe Hoffman and Erez Yoeli. Copyright © 2022. Available from Basic Books, an imprint of Hachette Book Group, Inc.

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