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Westworld captivated audiences for a second season with surprising reveals, untimely deaths, and more unanswered questions. The reimagined 70’s film set in a western theme park, sits at the intersection of man and machine, where humans act out their most depraved fantasies until a robot uprising threatens to destroy both the real and fantasy world.

On the surface, it is an exposition of the potential power of future technology—but underneath it details the moral and ethical dilemmas of a conscious a machine. Each interaction and decision—no matter how real or contrived—employs different principles of game theory found in everyday life.

The end is the reward

In the season 2 premiere, Dolores is on a path of destruction, killing seemingly anyone that gets in her way before encountering a group of guests looking to escape Westworld. Deciding what to do with them, she remarks, “Did you ever stop to wonder about your actions? The price you’d have to pay if there was a reckoning?”. It’s a profound statement that confirms Dolores is not the same subservient host in season 1 but an authority figure to take seriously. Viewers might also recognize her reference to payoffs and other conventional game theory principles.

Payoffs serve as the cornerstone of any decision, they can be monetary rewards like a cash prize or something unrelated to money, as in the classic example of the prisoner’s dilemma where two felons jostle for less jail time. The goal is to maximize (or minimize) your expected payoff given different outcomes and the actions of other players in the game. Sometimes that means taking less than the maximum to avoid a potentially harmful situation.

Each event is assigned a specific payoff and probability of occurence

In Westworld, we see characters struggle to understand this concept or even consider the impact of their actions. When William sets out to find the Center of The Maze in season one and later The Forge in season two, he does it hoping to find answers (his payoff).At each milestone, from Sweetwater to Pariah, hosts warn the Man in the Black Hat that the maze would be a major disappointment for a human like himself. He decides this was still his best strategy despite all the warning signs. Sure enough, The Center of The Maze, a gravesite beside a small chapel, didn’t live up to expectations and produced a suboptimal outcome. Had William considered the different possible payoffs, his dominant strategy might have been something else. (Of course, we wouldn’t have a show if he didn’t make this mistake)

Other times payoffs come up include:

  • William makes the same misinformed decision in season 2. Searching for The Forge wouldn’t get him any closer to finding answers or besting Dr. Ford.
  • Early in season two, as Maeve is ravaging the Mesa Hub, Lee Sizemore tries to alert security that Maeve is a host in disguise. He decides that betraying Maeve, perhaps the most dominant figure in the show outside of Dr. Ford, is the best strategy for escaping the mayhem. Of course, that backfired, leaving Lee to serve Maeve for most of season two. We see him make another futile effort to deceive Maeve later in the season without considering decisions or payoffs.

Together we can do more

Besides that, Westworld highlights other aspects of game theory like strategies, games and information sets. Most interactions are a mix of conflict and common interest. At the end of season 2, Dolores realizes she must cooperate with William after Teddy’s death to find The Valley Beyond. Working with William concedes the additional utility she could gain by finding the door on her own, but she admits, “You’re a monster. But a monster’s what I’ll need to get to the Valley Beyond”. This illustrates a dominated strategy where each player chooses a smaller reward over a more lucrative strategy. A similar situation also appears in the famous prisoner’s dilemma. Players can snitch on their partner to receive the shortest possible sentence, but given the potential downside risk, choosing to cooperate and accepting slightly more jail time is the logical response.

Information is knowledge

Part of the problem is not every player has the same foresight as Dolores. They can’t establish potential moves, optimal strategies, or what motivates other players until it happens. After all, their information set is constantly changing. Each action reveals new information that can be used with any preconceived notions to guide future decisions. Otherwise, such incomplete information results in adverse selections and moral hazards.

So, what’s the big deal?

Game theory appears in different aspects of finance and economic daily. And for the most part, the rules stay the same. Investors unknowingly apply game theory principles in different market situations from position sizing to risk management. Determining an optimal position that controls for risk and maximizes returns basically refers to the concept of payoffs. As an investor, it’s far-fetched to believe you can profit from every trade but taking a measured approach can carve out a winning strategy with minimal resistance. That way, losses are contained—conventional wisdom suggests never risking more than 2% per trade—and potential gains, limitless.

Where game theory in finance aims to manage risk and rewards, much of economics focuses on disputes and policymaking. Take the current trade war, for instance. President Trump continues to pick fights with our closest trading partners in response to decades of one-sided trade deals. While his hasty decisions appear (are) erratic, it sometimes makes sense to test each other’s resolve. South Korea and the EU quickly made concessions to Trump’s threats of tariffs before a full-blown trade war could ensue. Here, imposing tariffs on foreign goods (choosing to defect) helped improve our situation at the expense of another country, but sometimes defecting can be a dangerous miscalculation. If one side doesn’t believe the threat is credible, they may retaliate with tariffs of their own, leaving both participants isolated and removed from the market. This tit for tat exchange eventually ends when a country endures more economic damage than they’re willing to tolerate. With regard to the US and China, there appears to be no end in sight.

Here are some more resources

https://ncase.me/trust/ –> this is very good

https://fivethirtyeight.com/features/how-to-win-a-trade-war/

https://ujuzi.pressbooks.com/chapter/chapter-3-types-of-games/

https://www.investopedia.com/articles/financial-theory/08/game-theory-basics.asp

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