2006/08/17
by Tim Harford
What do love, war and poker have in common?
High stakes, perhaps.
Certainly, in all three you spend a lot of effort trying to work out what the other side is really thinking.
There is another similarity: economists think they understand all three of them, using a method called "game theory".
Threats and counter-threats
Game theory has been used by world champion poker players and by military strategists during the cold war.
Real enthusiasts think it can be used to understand dating, too.
The theory was developed during the second world war by John von Neumann, a mathematician, and Oskar Morgenstern, an economist.
Mr von Neumann was renowned as the smartest man on the planet - no small feat, given that he shared a campus with Albert Einstein - and he believed that the theory could be used to understand cold war problems such as deterrence.
His followers tried to understand how a nuclear war would work without having to fight one, and what sort of threats and counter-threats would prevent the US and the Soviets bombing us all into oblivion.
Since the cold war ended without a nuclear exchange, they can claim some success.
Understand the world
Another success for game theory came in 2000, when a keen game theorist called Chris "Jesus" Ferguson combined modern computing power with Mr von Neumann's ideas on how to play poker.
Mr Ferguson worked out strategies for every occasion on the table.
He beat the best players in the world and walked away with the title of world champion, and has since become one of the most successful players in the game's history.
Game theory is a versatile tool.
It can be used to analyse any situation where more than one person is involved, and where each side's actions influence and are influenced by the other side's actions.
Politics, finding a job, negotiating rent or deciding to go on strike are all situations that economists try to understand using game theory.
So, too, are corporate takeovers, auctions and pricing strategies on the high street.
Financial commitment
But of all human interactions, what could be more important than love?
The economist using game theory cannot pretend to hand out advice on snappy dressing or how to satisfy your lover in the bedroom, but he can fill some important gaps in many people's love lives: how to signal confidence on a date, or how to persuade someone that you are serious about them, and just as importantly, how to work out whether someone is serious about you.
The custom of giving engagement rings, for instance, arose in the US in the 1930s when men were having trouble proving they could be trusted.
It was not uncommon even then for couples to sleep together after they became engaged but before marriage, but that was a big risk for the woman.
If her fiance broke off the engagement she could be left without prospects of another marriage.
For a long time, the courts used to allow women to sue for "breach of promise" and that gave them some security, but when the courts stopped doing so both men and women had a problem.
They did not want to wait until they got married, but unless the man could reassure his future wife then sleeping together was a no-no.
The solution was the engagement ring, which the girl kept if the engagement was broken off.
An expensive engagement ring was a strong incentive for the man to stick around - and financial compensation if he did not.
Not committed
Modern lovers might think the idea of engagement ring as guarantee is a thing of the past, but they can still use game theory to size up their partners.
When a couple with separate homes move in together, selling the second home is an important signal of commitment.
That second home is an escape route - valuable only if the relationship is shaky.
If your partner wants to hang on to his bachelor pad, do not let him tell you it is merely a financial investment.
Game theory tells you that he is up to something.
* Tim Harford is a Financial Times columnist and author of "The Undercover Economist". He presents a new BBC series, Trust Me, I'm an Economist.
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