You are hanging out with two of your friends trying to decide where to spend the following weekend. Your options are a local spa or Las Vegas. While the more expensive option is a guaranteed good time, you are feeling tight on finances at the moment, and spending over $1,000 next weekend doesn’t feel very wise or comfortable. Then again, your friends seem really excited about the Vegas option and you don’t want to let anyone down.
In the above scenario, you are weighing out your options, trying to make the most favorable decision, not only to you but also in regards to your friends. This strategic thought process is studied by scientists from all different fields and is known as Game Theory. The name is rather appropriate, considering life is really like a game, everything we do is a calculated move, as we try to situate ourselves nicely on the board game of life.
Originally game theory looked at zero-sum games, which tried to prove people operate on a system of exact exchanges, equal parts lost to equal parts gained. For instance you buy your roommate dinner tonight, because she bought you dinner last night. Of course, humans are never that simple all of the time, and so since its origins, gaming theory has expanded into complicated scenarios. In simplicity, it aims to describe why we do what we do in social situations.
How Can You Use Game Theory To Improve Your Finances?
Understanding how people think and why they do what they do gives you a lot of power. You can better understand your loved ones and even yourself; in fact, you can actually use the ideology behind game theory to improve your own life. According to one NYU professor, you can score a better deal on a car using game theory. He says he’s successfully done it at over 11 car dealerships. Business Insider explains that this professor simply calls up a number of dealers, says he will buy a specific car at a specific time that day from the dealership that offers the best price. Since car dealerships work on ‘dominate strategy’ logic, this means they want to make a sale more than they want to make a large profit spread, the Professor gets a great deal from someone.
If you just walk into a dealership, the salesmen are going to be using game theory psychology on you, selling you a car at the price they want. Few businesses use ‘optimum outcome,’ which would be the opposite and mean that they only want to make a sale for full retail price. Always keep this in mind when negotiations are on the table.
Besides getting a better deal on your next car, you can use game theory to improve your finances in many other aspects of life, too. If you are going to buy a house, or anything that involves negotiations, you can get a better deal by thinking outside of the box, and applying game theory to understand the real thought process of the seller and anyone else involved. You can also take note of your own rationalizations to help you spend less and save more. The mind is a powerful thing, the better you understand how it operates, the more control you have over your own destiny and bank account!