What Basic Game Theory Teaches Us About Startups

They never get the lessons in little dabs along the way. Like, you know, as kids, we're used to getting these little lessons along the way. For these zero-sum games, often the lesson just comes fast and hard at the end. It's like, "Oh!" This is Michael Seibel with Dalton Caldwell, and today we're going to talk about the problem with zero-sum games.

So we were chatting, Dalton, and we've seen a lot of zero-sum games kind of in our lifetimes. It seems like it's something that comes and goes pretty, pretty often. Why don't we start with kind of the first time you've encountered a zero-sum game and almost like how you got trapped by it?

Yeah, so just to start with definitions, please. A zero-sum game is a game that you play where the upside that you're getting comes directly from the other player. So if we're talking about money, a classic zero-sum game is we make a bet. And so say we bet, you know, 20 bucks something will happen, and you win. The money that you win comes out of my pocket. There's no new money that's created in the system; it's zero-sum. So whatever you gain, I lose, and it all equals zero.

Okay, that's zero-sum. A positive-sum game is where something happens and as a consequence of it, value is created that lasts for a while. And so say that we decided to do something for fun and we built a house. We're like, "It'd be fun to build a house." And so we do the thing, and then when it's all said and done, the house exists. Our labor produced something that will last, you know, that wasn't there before, and we can charge rent for it and maybe generate some income.

Yeah, exactly. So we were entertained in both scenarios, where we made a bet versus built something. In one of those scenarios, it was a "we made something that lasts," and the other one it was just a zero-sum form of entertainment.

Okay, so the most common thing, of course, I even had to use it for the example, is literally gambling. Literally gambling is like the textbook zero-sum game. If we play poker, the money that you win came out of someone else's pocket, right? If you... any kind of sport, unless you're the house, which, that's the actual good business! [Laughter]

And it's wild. Gambling is fun; maybe not for everyone, but do you think... what's your experience with this stuff? I find that gambling, I think, it trips one of these things in everyone's brains that makes them feel good, but it's probably bad for them. And I think they're like a lot of things like that we encounter in the world. Right? You know, let's say sugar is like that. Nicotine is certainly like that. I would say that, you know, social media kind of triggers that feeling of like not wanting to put it down. And gambling is another one of those things. Like, I would almost say that it takes advantage of an inherent flaw in our programming.

And I think that flaw has something to do with getting disproportionate wins without the perception of doing a disproportionate amount of work. And like, I almost sometimes imagine that there's got to be some prehistoric proto-human where like that was like heaven, right? Like it's like if you can somehow windfall into a dead buffalo and you didn't have to risk your life killing it, like bam, that's like huge, right?

And I think that, unfortunately, in today's age, it tends to kind of happen in these ways that aren't as good. A lot of gambling... the other part of what you're saying, the darker part of saying, is in order for me to win, you have to lose. But what's weird is that there are a lot of things that kind of resemble gambling but that people don't call gambling, right? Like what are some other examples of quote-unquote gambling out there?

Well, think about it. Okay, so poker is a game I played a lot. I'm sure you have, too. And in poker, the rules are it's okay to bluff, and you're rewarded. Like, the game is to manipulate other people around you to do dumb things. It's not hard to take one extra step to do that kind of behavior outside of poker. And so there's a whole variety of both legal and non-legal confidence games where essentially the way you win is to manipulate people and get them to do what you want when you want them to do it through any means necessary.

And yeah, I think that is rough, and a lot of people do some version of that. I guess we maybe we all do to some small extent, but some people really take that to the extreme of making their entire living by, you know, fooling other people, more or less, right? Well, it's crazy because you talk about legal versus illegal. But you know, back in the day in the U.S., I was reading this biography of Morgan Stanley. And like one of the things that happened in the early, in the early 1900s before a lot of the financial regulation is that banks would regularly kind of sell really bad paper, really bad debt to unassuming normal Americans, make a lot of money on the transactions.

I think the one example I read, it was some country, some country was speculating they sold a bunch of debt they couldn't pay it back, and a bunch of Americans just lost the money. And the bank forcing the transaction did fine. The country? Well, they can always print more money. And it's interesting because you know, in that time, doing that was not illegal. Like it wasn't illegal for the bank to resell something to normal people when they had knowledge that it was bad paper but those people didn't.

And it's funny how many of the financial regulations today come from people in the finance world basically doing zero-sum games and like harming normal Americans. And harming them so much to the point where they're like, you know what? We should do... we should like get a law passed because this is crazy. Like this doesn't scale. Like this can really screw a country if you let people play these zero-sum games to the extreme.

Yeah, and there's some amount of like lack of empathy or viewing of intentionally wanting to, you know, victimize other people. Like there's something... there's some dark stuff along that whole line of thinking. I think if you feel that you are smarter than other people—and this is something we encounter sometimes in our jobs—I think if you feel that you are more intelligent than others, perhaps you can end up on this slippery slope of moral arguments that it's okay for you to make a living off of other people's work because you know you used your intelligence, your superior intelligence to get them to go along with this.

Right? You've seen this a lot. They kind of feel like that's freedom. Like that's like a free market system. Like that's okay. Like not even okay. Like our system encourages you to win no matter what. Or if you're smart enough to win, then like the means didn't matter. And I think that what's so tricky is that like it's so obvious the society we live in today was built by people who were playing positive-sum games.

So what it really is, is like those people created like a little bit of excess capital that the zero-sum game people are like harvesting. They're kind of like slowly degrading society. And as long as like the positive-sum game folks stay ahead, society progresses. But in times where the zero-sum game folks kind of get too far ahead, I mean, we lived through one of those financial crises—the last financial crisis, maybe the current one. The second the zero-sum folks get ahead, like the world literally goes to... like it's quite funny how like the world starts looking really bad when the zero-sum games take over.

It's interesting because this is something you brought up, the idea that like people are getting rich out there and I'm missing out. Like I think that we've been in the last four or five years in a zone where like people are kind of seeing people out there getting rich with games that seem too easy. If stocks only go up, it is easy.

Yeah, you know, and you might as well buy margin because it'll only go up faster. Right? I think that if I can predict the future a little bit, when everything's going up, it's easy to think you're the smart person. When things start going down, you start realizing who the real smart people are. And it tends to be a way, way smaller group than you might think. And turns out that they're taking money—like they're playing the zero-sum game 10x better than you are—and they start taking money from you.

And then you start losing faith in the system because you ask yourself, "Why did the system not protect me?" Like, "I didn't do anything wrong. Why am I punished?" And it's like this negative feedback cycle that only exists on the zero-sum side because like our friends who tried and failed to do positive-sum games, they almost always learned something or advanced in some way.

Like they almost always took something from that game with them that made them better off even if they didn't win. Whereas like the folks who are playing the zero-sum games, if you don't cash out, that was the only thing you could take out. Like that was the only win is like getting out of the game. They never get the lessons in little dabs along the way. Like, you know, as kids, we're used to getting these little lessons along the way.

For these zero-sum games, often the lesson just comes fast and hard at the end. It's like—and then you're blown up. I mean, you do these office hours with companies where it's just game over. Like it's like it's good, it's good, it's good... okay, we're dead. There's no warning, especially when you deal with debt and leverage, which is again related to this stuff. When you are gambling with money that's not yours, and you're how heavily levered, it's rough.

So let's make... let's take this positive. So again, like we're seeing all the... what is right side? What's the advice? Like how can you make sure what you're doing is positive-sum? And like how can you build enduring value and not accidentally...? You know, what's the move?

You know what, Dalton? I don't think people are confused whether they're gambling or building houses. I think that they know whether they're gambling or building houses. Do they? I think they know. I think that the thing they have to resist is the FOMO. I think the more deep question is how do you build houses when you see a lot of people getting rich gambling all around you?

How do you kind of stay strong and build a house when you see people getting rich around you? And you know, it's funny because I had a friend who was a sports gambler, and I think I learned this lesson through him. He would always tell me when he won that weekend, and he'd always bring in like stacks of cash, and he was like, "I'm way up!" And then the weekends he didn't win, he was just silent.

And I think I always assumed that like, oh, like he must not have gambled that week. I don't... what do I know? I'm not paying attention. And I think that like for those people who are looking at the folks who look like they're winning in those zero-sum games, I think if they looked a little closer and they asked themselves, "Are those people actually cashing out? Are those people actually doing something sustainable? Like are those people drinking the Kool-Aid so hard that when the turn comes they won't be ready for it?"

I think they'll start realizing that they should feel less FOMO. That's how I feel. Like how do you feel about it?

Yeah, I think, look, I think people can convince themselves of anything. In fact, this is definitely something I've learned over the years is like no matter how crooked someone is being, they have a story that they cling to, and they refuse to see it any other way than that. And so I think you kind of want to look for external validation that you're building something of value that's enduring for people and understand, be able to articulate that in a very simple way—what that is.

What is the leave-behind value that is being created? The consequence of my work? And am I winning because someone else is losing? Or is it like something real? I mean, we're seeing this right now with a bunch of our startups. A lot of folks, okay, you know, it's hard out there. We can't raise whatever. But our startup's still running. Like they're still growing. They're still—like the company is just doing the same thing. And the stuff happening in the external world is noise. Yes, those people are doing a real thing—a positive-sum game.

Yeah, well, we're done. You know, like the people where immediately the music stopped—that's rough. Like if you're that sensitive to market conditions that literally you don't have a company anymore the minute the markets drop. A lot of the founders, to your point, are actually solving someone's real problem. And so it turns out that if you're solving someone's real problem and the economy goes down, it's not like they still don't have that problem.

I think the other thing I think about is legacy. You know, we were joking. We know a lot of rich and unhappy people, and I think the reason—the core reason why those people are unhappy is because they're concerned about their legacy. Like they realize that making money and making impact aren't one and the same. And I think the older you get and the more you experience life, the more you realize that, like, money's great. Don't get me wrong, it's amazing. But like money can't make you feel good about yourself.

Like legacy is what makes you feel good about yourself. I think that like what's interesting is that as you get older, you start realizing, you know, there's this stack of people who actually progress society, and then there's a stack of people who don't. It's very uncomfortable. And I'd argue most people are on the stack of people who progress society.

Like even people you don't consider—like the random person who works in a random job and like fulfills their duty and like raises kids and teaches them to do right and to work hard—that person's in the building society group. But there's actually a, you know, a large number of rich people who are kind of not in that building society group. You know, they made their money by taking it from others who are dumber than them.

They look back, and they're really concerned, and you kind of can't wash that off yourself very easily. And so, I don't... you know, I would just be like, "Hey look, like if you're thinking about this, if you feel like maybe you're caught in this trap, like think about that legacy. Think about the lesson you want to teach your kids."

And often say this to founders like, "Hey, when you're dealing with this problem, imagine that you... imagine this problem you brought to me, your group partner, an employee brought to you. What would you tell them to do? What would be the example? How do you do the thing now that would be the example for your employee or for your child?" And then when you think about it that way, you'd be like, "Oh!" You know, you tend to be like, "Yes, I should go after positive-sum things."

And if that's the example, if that's what you'd want your kid to do, you probably should take that advice too, is kind of how I look at it. And be on the team that's making society better. Like in the long run, you'll feel good about that. And man, like when you're rich and unhappy, like wow! Like talk about negative feedback loops. Like you try to spend money to get happiness, and it produces a lot of unhappiness. Like it is impressive how that happens.

And drugs and alcohol and yeti—all those things. Maybe the other message is if you've got a friend who's doing the positive-sum game, give him a pat on the back, give her a pat on the back. Like they're probably taking it on the chin right now, but like man, at least they're trying to play the game the right way.

Yeah, I think what you want to do in every situation you're in, whether it is, okay, let's extrapolate this—whether it's a startup, whether it's a job, even if it's a relationship—like we can frame a lot of things for this. Is this a zero-sum situation or a positive-sum situation? Like in a relationship, imagine if you make each other better. One plus one equals three, like with great friendships or romantic relationships. You make each other better; that's positive-sum.

Right? And so I think this is just like a helpful framework to look at everything through of zero-sum versus positive-sum. And you know, life's short, man. Try to put your energy into interacting with positive-sum situations as much as you can, and it'll pay back in ways you can't even possibly imagine. And the externalities of it are much better. Like the impact you're gonna have on other people is gonna be better if you always choose to play the positive-sum games. You know, and even if you say, "Screw that!" be careful with the zero-sum games because today you're taking money from a dummy, and tomorrow you might be the dummy.

[Music] [Laughter] Alright, man. Great chatting, Dalton. Sounds good! Thanks.

[Music] [Music]