Game Theory and Trust In Business

Trust is an essential component of business. Yet, at the same time, people tend to foster a high-level of mistrust. I believe this is due to what is known as a “Nash Equilibrium”. Nash Equilibrium is a basic term used in Game Theory. It is best explained by the concept of the prisoner's dilemma, which was developed in 1950 by mathematicians Merrill Flood and Melvin Dresher during their work at RAND. They created a specific scenario in Game Theory to illustrate the complexities of cooperation and self-interest among rational agents. 

The “prisoner’s dilemma” illustrates how two rational agents, each optimising for their own interests, can still arrive at a suboptimal outcome. When people focus solely on their own results and choose between two options, one strategy often dominates. In real life, I’ve observed this dynamic in one-on-one negotiations, romantic relationships, and many other situations.

Let’s Look At an Example

I frequently ask myself why people play “hard to get” in relationships, and Game Theory provides the answer—it’s a strategic move to increase perceived value, making the other person more likely to invest effort in pursuing the relationship. The numbers I chose below are somewhat arbitrary, but not fully: A situation in which both people play hard to get (denoted as “-4”) is clearly a bad relationship. A lot of time is wasted deceiving your partner, rather than focusing on the great things one could do together. The only thing that’s worse than that is if your partner plays hard to get while you are fully transparent about your feelings (denoted as “-20”). If you play hard to get, but your partner doesn’t, this puts you in the driver seat of the relationship (denoted as “+1”). If both people are fully transparent, there is no suffering whatsoever, just a healthy, straight-forward relationship.

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Interestingly, when both partners in a relationship act rationally, they both end up playing hard to get. If one chooses the strategy “play hard to get,” the possible outcomes are -4 or +1, whereas choosing the only other strategy results in -20 (opposed to -4) or 0 (opposed to +1), which are worse in both cases. Consequently, it always makes rational sense to “play hard to get” because one is better off regardless of the other person’s choice. In a purely rational world, both partners end up following this logic, leading to a relationship that is objectively worse than it needs to be. 

How It Relates to Business

In a business relationship, for example with your co-founder, we can play around with the same numbers. If you self-optimise and do not take others into account for your own decision-making, you’ll… 

• Create awfully long SHAs considering every contingency. 
• Spend a lot of your time checking on people. 
• Lose time playing hard to get with investors even though it's a perfect match

When both agents mistrust each other, they spend more time negotiating and creating complex contracts, resulting in a (-4, -4) outcome. If both agents fully trust each other, less time is wasted, this leads to a (0, 0) outcome. Should one person trusts while the other does not, the person who does not trust is exploited for the other’s gain, represented by (1, -20).

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As Naval Ravikant famously put it, “Play long-term games with long-term people,” because the only way to achieve global optima is to move beyond short-term thinking and choose business partners, peers, and friends you trust for the long haul.

This principle isn’t just philosophical—it is mathematically proven to be a more effective way of approaching relationships. Political scientist, Robert Axelrod, ran a series of simulations in where agents adopted different strategies, such as kindness or aggression, and other strategies over the long-term (i.e. they play multiple rounds, not just one). The results showed that agents performed best when the strategy was tit-for-tat—being kind to those who are kind and responding in kind to aggression. If you’re interested, I recommend you read Axelrod’s papers: “Effective Choice in the Prisoner’s Dilemma” and “More Effective Choice in the Prisoner's Dilemma”.

In short, I believe founders and investors could save a lot of time by thinking long-term and having high trust from the very beginning. I personally found it much more effective to be high-trust by default and categorically stop doing business with people who exploit my trust. I find it fascinating how well Game Theory explains how trust leads to better outcomes in business, and I am happy that in this case, there is a mathematical model vouching for approaching situations with kindness as per default.

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