Game Theory in the 21st Century: Reputation As Currency

Game theory is the study of decision making.  As conscious beings, we are continuously making decisions throughout the day.  If were to generalize these decisions, we could sum this up as seeking pleasure and avoiding pain behavior.  Things get interesting when you apply this study among a group of people, each of whom has unique pleasures and pains.

What game theory attempts to do is provide a mathematical model of conflict and cooperation between intelligent rational decision-makers. In a previous blog post, I made the argument that language is the greatest currency ever invented.  That’s right!  Language — more so than the dollar, yen, euro, claim, shells, or bag of grains, or any fiat currency for that matter — has had a much larger effect on generating wealth, operating as a medium of exchange, and providing social value and class mobility.

When we think of the word ‘currency,’ usually the first thing that jumps to mind is the physical piece of paper in your pocket.  The etymology of currency stem from it’s Latin origin currens, meaning “to run” or “to flow.”  Wealth, in this way, is described in a flowing and mobility sense.

This goes counter to todays general concept of what wealth is.  Wealth is something we try safeguard and protect.  It’s our holdings and 401k’s that provide security late into life.  There isn’t much flow in a system designed to safeguarded!  It’s a contradictory definition to its etymology.  Things we generally include in our lexicon of wealth are: stocks, bonds, 401k, fiat, minerals, etc.  Do you more commonly regard these things as flowing in nature, or more so something you try and barracade? Our attempt will be to flip this paradigm on its head and analyze different ways to think about wealth, more particularly, reputation’s role.

Before we dive into this hairball, I want to reiterate the importance of acknowledging things outside of fiat currency as wealth. Wealth in spirt, wealth in friends, wealth in memories — the definition of wealth we’ll proceed forward using is under the sense as describing abundance.  Bottom line is: these things changes over time.  What makes someone wealthy in one generation doesn’t translate to the next.  Our concept of wealth evolves.

As these methods of wealth evolve, reputation will drive to be the preeminate player in 21st century economics.

Please go back and read it once again, that sentence is rather important to conveying the rest of the points in this post.  What game theory has shown us is the importance of accounting an individual’s previous actions and behavior when trying to predict their future behavior.

Robert Axlerods tournament demonstrated this on mechanistic level, in which computer programs were paired to compare various strategies of the prisoners dilemma. If you haven’t read the case study, the snapshot is that the prisoners dilema is a game that measures cooperation between 2 players, both trying to avoid jail time and maximize their free time (think back to that seeking pleasure and avoiding pain behavior discussed in the beginning).   Jail = bad (pain), not-jail = good (pleasure).

They can blame the other person, and get off scotfree and the other guy faces the full wrath; but if they blame each other, then they both would get a worse punishment that if they had choosen to cooperate to begin with.  Thus the dilemma.  This scenario was played out by various computer programs with dispositions to elicit type behavior e.g., when to cooperate and when to defect.

If we are to proceed under the assumptions that jail time is something everyone wants to avoid, we can measure those interactions by associating value to the number of years in jail.  Obviously a quick defection here and there might get you away from avoid any jail time, but it sets you up for future players lacking any trust in your future behavior.


And the Winner is… Cooperation!

Axlerods goal was to see that in through multiple iteractions with other players, and using the payout matrix of the prisoners dilemma to associate value, if there was a “most-rational” mode for making decisions.  Sneaking in an occasional defect can in the short term reduce the number of years in prision for one interaction, but how does it effect other players perspective of you in future interactions? The program that ended up winning the tournament, in every single simulation put under, was the TIT-for-TAT strategy.

The strategy goes as follows:  (1) always always always be willing to cooperate!  If both players proceed to do this through every interaction, great!  You can stop there.  (2) As soon as (if) the other player defects, defect right back and continue to defect as long as the other player chooses to defect.  (3) Immediate be willing to go back to cooperation when (if) the other player chooses to cooperate.


There were 3 interesting conclusions in this study:

1) forgiveness and willingness to go back to cooperation were absolutely crucial to it’s success

2) even if 95% of the other players are “mean” players (defect more than cooperate), even just 5% of “nice” players (cooperate more than defect) can win by working so well when paired together

3) even though TIT-for-TAT had the highest collective score, it never won and head-to-head match — in fact, it was impossible    Read more in my post on the values of cooperation for furter explanation.


Applying Game Theory to Reputation

How does this apply to game theory and reputation as a currency? Although the computer programs serve as a crude and ruderistic example of human behavior (again, we will generalize things with seeking pleasure and avoiding pain behavior), the principles demonstrate the importance of using someone’s previous behavior to predict their future behavior.

We are already beginning to do this from a P2B level, as Yelp, Yahoo, Google+ reviews and other 5-star/apples/other measures are slapped onto a business or service.  These reviews of restaurants, movie theaters, hotels, etc. come from previous players, and their interaction with the business or service.  These reviews help other players predict future interactions with that business/service.

Although Axelrods tournament had a simple payout matrix (4 options), these reviews operate under a similar mentality of evaluting “behavior” of an entity, and using that evalution to influence other players decisions when interacting with that entity in the future.  This has never before existed!  We are starting to see this creep in on the P2P level as well — and THIS — more so than any other point I hope to convey in this blog post — is where 21st century economics is leading.

Where it used to be just customers rating the businesses, slowly the reputation is starting to bleed both ways.  Companies, such as Airbnb and Uber, show an early example of what it looks like when the company rates the guest.   Uber drivers and Airbnb hosts can rank their customers as well.  Have a reputation for being obnoxiously drunk and puking in the cab?  Good luck getting a future ride.

In 21st century economics, reputation goes both ways, and it’s the most valuable thing that we own.  Again, the value of reputation is that there is simply no better metric for predicting future behavior than using someone’s previous behavior.

We already have had an early taste in our professional lives, as LinkedIn has an early prototype for reputation via their endorsement feature.  Does having a ton of endorsments influence your chance for landing a job?  You betcha. That’s only the beginning, though.  Social media, through Twitter and Facebook, allow us to measure the extent of ones network.

Is someone with 10k followers viewed as more trustworthy and credible than someone with 10?  Social following becomes a currency for establishing trust and verification.  This is huge form of credibility.  Klout, a service that is specifically geared towards measuring and ranking someone’s social network, is becoming a more important tool.  When choosing to hire someone, there are more and more cases of companies wanting to evaluate the extent of your network.  Companies are no longer just hiring individuals.  They are hiring individuals, and the networks they bring with them.


Problems that Could arise

If we have to constantly be on the guard of our reputation from ubiquitous reviews, it could leave for an altered, half-assed means of conducting oursevles.  Our interactions could be cheapend.  If so much is contingent on our reputation, it makes protecting of the upmost vital importance.  Cyber bulling and trolling have very dramatic effects.  A verification method would have to be in place to serve as the authenticy of a review.

In the coming age of social media, our “personal brand” is going to become a much strong part of our identity.  Another issue I see arising is the pressure to portray a “false” life.  Psychologists have already done enormous studies on social media, and the picture perfect lives that we often try and portray.

What I see more likely being the case, is that those who are more authentic stand out among their peers.  Lots of studies have shown how we revere someone who shows vulnerability and the capencity to make mistakes.  It adds to their humanity.  But the pressure, nonetheless, will exist for having to portray the best “personal brand” possible.


Personal Takeaways

One of the things I find most interesting from Axleords study is the role of forgiveness.  In every instance, the TIT-for-TAT strategy was most successful because of it’s quickness to forgiving.  Holding grudges does neither player the benefit. Forgiveness, to me personal, was something I had always regarded as more of an emotional and personal response.

What this study shows is that you can analyze forgiveness under a rational decision-making perspective as well!  Forgiving others simply makes sense.  What personal grudges are we still holding in our own lives?  Whether it be with people, events, or things.  What value do those bring you?

Lastly, this begs the question for altruism.  Philosophers have long argued over if pure altruistic motives can exist.  Coca-Cola, one of the largest corporations in the world, showed us a glimpse  of what this looks like with their marketing campaign in November of 2013.  Coca-Cola announced that instead of spending any money on their marketing campaign, they would donate all the money ($2.6 million) as relief to the hurricane victims in the Philipines.

Does Coca-Cola really care about those victims, or are there other motives at hand?  Could this be just a clever way for them to win some sympathy?  My response: who gives a shit?  If billion dollar corporations are going to start bidding over market share by spending millions on helping out those in most of need, well then I say I fully welcome this future economy.

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