The Problem With Game Theory – The Philosophy of Billions - YouTube

Hey Wisecrack, Jared here. Full disclosure - This video is brought to you by Showtime.

We were flattered to hear they dig our stuff, so when they reached out and asked us to watch

their show Billions, which is coming back for its fourth season on March 17th, we were

really stoked. We checked it out, and it’s pretty great.

On the surface, Billions is a drama chronicling the rivalry between a ruthless billionaire

and an equally ruthless US Attorney vying for their own brands of justice. But today

we’re going to argue that among its many facets, Billions reflects on how games structure

our lives, and how when we gamify our goals, it can have a corrosive effect on our sense

of morality. And while “people losing sight of their morals” is a common refrain in

media, Billions frames it in a novel way: with game theory.

Welcome to this Wisecrack Edition on Billions. And as always, spoilers ahead. But first,

a recap of the show thus far. Billions is the story of Chuck Rhoades, US Attorney for

the Southern District of NY, his billionaire nemesis Bobby Axelrod, and the people enmeshed

in their personal war. Rhoades is an ambitious prosecutor who fights for the “little guy,”

using his clout and office to put white collar criminals behind bars. He also has a penchant

for cold calculus bordering on sociopathy, as he betrays friends and family to realize

his ends.

"You used my company, my career, my future" "My money"

"And my own, yeah" "Moves like that. Where do you get the f*****g

nerve?"

With higher public office in mind, he picks his cases, forges alliances, and does a fair

share of backroom dealing. He’s flanked by Kate Sacker and Bryan Connerty, two ambitious

and morally driven prosecutors in his office. All the while, he tries to maintain his relationship

with his wife, Wendy, who works as a performance coach for the man her husband is trying to

imprison.

"You know there's a psychological profile for people who self sabotage, and you're starting

to fit it."

Chuck, the manipulative man of justice, is contrasted with Bobby Axelrod, a mega-rich

hedgefund manager who never forgets his humble beginnings

"You're driven in the way only someone brought up from nothing, the way we were, can be.

Or his love of Metallica. His staff is unflinchingly loyal, especially his right-hand man, Mike

Wagner AKA: Wags. But like Rhoades, Axelrod’s drive to succeed is marred by morally, and

legally, questionable behaviors: Insider trading, profiting off of 9/11 victims; as well as

a stubborn sense of pride that leads him to flaunt his wealth to law enforcement

“The house - I want it." "Okay, let's take a beat. People are gonna

say that -" "They might - offer 63 million cash - take

it or leave it on the call."

Eventually, this all contributes to an ever-increasing divide between him and his wife, Lara, and

his protege Taylor. More than the clash of Chuck Rhoades versus Bobby Axelrod, Billions

explores how the road to power is paved with corruption, lies, and eroding morals. And

it’s the concept of “game theory” that highlights just HOW this happens.

So, what is game theory? While you may intuit that it’s the study of things like poker,

and that’s not wrong, it’s more broadly the study of how people make decisions in

a strategic manner. So, if you want to ask your boss for a raise, you want as much money

as possible, they want to give you as little money as they think it will take to keep you.

If you’re the employee, should you set a number first, or let your boss? Should you

ask for more than you actually want? How much more? Is there a difference between asking

on Monday rather than a Friday? After lunch or before lunch? This methodical approach

can be applied to online dating, selecting a jury, running for office, and of course,

playing the stock market. Game theory is all over billions, sometimes explicitly:

“And the manager played some heavy game theory on me, boxed me into a spot, essentially

put himself in a position to win no matter what I said”.

In the world of Axe Capital, game theory is used in the name of making more money.

"So who is this fake factory supposed to be supplying? What does this ripple out into?

You find that, you find Krakow's real investment"

Traders hedge their bets, leverage positions, and take short term losses for long term gains.

They also mislead their competitors.

"We're not bailing. We're pruning slowly, so we don't scare the market, and keep this

on the f*****g DL"

and try to manage the flow of information to the outside world. For the office of Chuck

Rhoades, the game theory is employed a little differently. It’s not a matter of multiple

parties trying to outsmart each other on the stock market. Rather, it exists in the crafting

of plea deals, political maneuvering, and determining investigative tactics.

“We can, from this moment forward, remember how the game is supposed to be played."

But one game theory principle that gets a specific shout-out is central to understanding

the show:

"I like to call it the prisoner’s dilemma."

"No, you don't like to call it that - that’s what it’s called. It started as a thought

experiment. Game theory in the 50s. Does no one check you on this bullshit?"

The prisoner’s dilemma is as follows: Two people commit a crime together, let’s say

robbing a bank. They get busted, sort of - the prosecutors only have enough evidence to convict

you of a lesser crime - let’s say trespassing on private property.

You’re separated from your fellow robber and not allowed to talk. But here’s the

deal, if both of you keep quiet, you each get 1 year in jail for trespassing. If you

rat on your buddy, they’ll get the maximum of 10 years, and you’ll get off scot free

- and vice versa if they rat on you. But if you BOTH rat on each other, you get a little

leniency for the bank robbery, but still have to serve 8 years. What’s the ideal way to

play this? If you said “Rat on your buddy so you can walk free,” well, they’re also

probably thinking this, and you’ll both end up worse, with 8 years behind bars rather

than if you both kept your mouth shut and got 1 year.

Billions employs the Prisoner’s Dilemma as Chuck’s office is trying to get a guy

named Pete Decker to testify about Axelrod’s insider trading. If Decker cooperates, great,

he can stay out of jail. If he doesn’t, there’s another investor more than willing

to snitch first

"Mr. Decker, approximately 2 and a half hours ago we had someone sitting where you are now.

A young man from a fund that I'm not at liberty to name and he was downright chatty."

....well, sort of.

"But to be clear we don't really have anyone?" "To be clear, I am making a play."

That second person was invented by Rhoades to make him THINK this was a kind of prisoner’s

dilemma, but Decker isn’t falling for it. Chuck and Spyros are acutely aware of how

their job intersects with game theory. The prisoner’s dilemma can be used to understand

more than just who’s going to jail. It can describe any situation where there’s an

incentive to betray your compatriots, but where everyone is worse off if everyone does

it. Think of waiting in line at a show. Everyone gets inside quicker by waiting their turn.

If one person cuts ahead, they get the benefit of the line without paying the cost. If everyone

tries to cut, the line devolves into anarchy, and everyone has to wait longer. It’s the

prisoner’s dilemma with more than 2 people (in this case it’s called the free riders

dilemma). It’s also something Chuck understands as he accosts a man for not cleaning up after

his dog:

"You know if, if - I let your dog shit slide then I have to be ok with this whole plaza

filling up with it, which it would. Before we know it - oh. And it would be on our pant

legs and our shoes, and we would track it into our homes, and then our homes would smell

like shit too."

According to author William Poundstone, the prisoner’s dilemma acts as a compelling

metaphor for how society works. If we all do the right thing, we all win. If almost

everyone does the right thing, then the cheaters win, but we’re mostly still alright. And

if everyone is a cheater, we all lose, it’s anarchy. As Poundstone writes: “The paramount

importance of civilization in human history rests with its role in promoting cooperation.”

The prisoner’s dilemma can help us understand why LOYALTY is so important to Axe Capital.

In an environment where anyone can get caught by the feds and bring Axe’s legacy crumbling

down, Axe retains people who exhibit unflinching loyalty and cuts loose anyone who does not.

Axe’s right-hand man Wags makes this explicit when he complains about an employee who shopped

an outside offer to increase her bonus. He vows to make her life miserable, despite the

fact that she’s great at her job, because she’s disloyal:

"So it's really not because she's a woman?" "No. It's because she got out of line. You

know that we're upping Donnie Kahn's capital, tripling it. I asked Axe why. He said Donnie's

loyal - good soldier."

The name of the game is cooperating with Axe, not defecting to the feds. If you were to

play the prisoner’s dilemma with a complete stranger, divorced from all outside consequence,

a savvy game theorist might tell you that the most RATIONAL thing to do is to betray

the other player. But in the world of Axe Capital, these situations don’t happen in

a vacuum. First off, choosing to “cooperate” or “defect,” as the options are labeled,

doesn’t just happen once and you go home. It happens over and over again. It’s a game

that gets repeated. If you “Defect” once, there’s everyone else in the office who

could testify against you at any time. Axe’s demand for loyalty beyond all else removes

any doubt in a situation like the prisoner’s dilemma - nobody defects to the feds, and

everyone's better off in the end. It’s essentially “honor among thieves." Sure they can starve

a small town into default:

"A spot like this will kick off our astroturf campaign, to make it look like the area is

getting a bailout, not a death sentence."

But the worst sin is to pack up and start a rival firm. Games like the prisoner’s

dilemma get a little more interesting when played iteratively, that is, over and over

again. And when we frame the relationship between Axe and Chuck as an iterative game,

it starts to look like the prisoner’s dilemma. Throughout the show, Chuck and Axe go to further

and further extremes to hurt each other. It starts with psychological warfare. Chuck tries

to goad Axe into buying a beach house that will draw public scrutiny:

"Well, the kids in my office really thought you might buy that house. And I told them

you've got big balls, but not that big."

and Axe knowingly obliges him to satisfy his ego. Axe gets a seat on a company’s board

just to spite Chuck’s father’s mistress and Chuck arrests Dollar Bill. This dynamic

is put on display as Axe is about to take a plea deal with Chuck. Chuck taunts him:

"Brian. Didn't he say that he would never settle?"

Axe and Wags to respond in kind:

"You got me, Rhoades. 1.9 Billion. It's gonna hurt. But not - not like a sharkbite. More

like a - a what - a bee sting." "A bee sting? No that hurts. More like a horsefly."

"No. More like an ant."

Chuck takes the offer off the table, and Axe rips up the check in a fit of rage. Things,

of course, escalate. Chuck snoops into his wife Wendy’s therapy notes to get dirt on

Axe, and Axe in turn threatens to blackmail Wendy. Chuck leads Axe to believe, falsely,

that his office is bugged, causing Axe to tear the whole place apart. At another point,

Chuck is forced to sell a beloved rare book collection, which Axe capitalizes on by buying

it, and every other set, in the world. It’s tit for tat.

Game theorists have studied strategies to the “prisoner’s dilemma,” when players

have to play out that dilemma over and over again for points. One of the most effective

strategies is “tit for tat.” This strategy in game theory was pioneered during a computer

tournament of the prisoner’s dilemma in 1980 hosted by none other than another guy

named Robert Axelrod. Coincidence? This computer strategy was simple. Cooperate, and only defect

AFTER your opponent had:

“The price of any betrayal always comes due in flesh.”

If they go back to cooperating, you cooperate, if they don’t, you don’t. It’s remarkably

simple, and follows basic human morality. Play nice, unless you’re wronged, then seek

justice. Tit for Tat is an incredibly effective strategy in an iterated prisoner’s dilemma,

and cleaned up at Robert Axelrod’s tournament - twice. But there’s a problem. If both

parties are abiding by “tit for tat,” you can end up precisely where Axe and Chuck

are-where one wrong-doing begets a spiral of revenge.

We can translate the overall dilemma into one of our handy dandy charts - called payoff

matrices. Chuck is Player A, Axe is Player B. Cooperating, more or less means they leave

each other alone. If Chuck isn’t going after Axe, and Axe isn’t bankrolling hundreds

of lawsuits against Chuck, they’re both kind of happy, but neither got what they fully

wanted. So, we can say they’re both cooperating. So, I dunno, 50 points for each. If Axe leaves

Chuck alone, but Chuck is still after Axe, then Axe has no leverage and will probably

end up in jail and Chuck will be well on his way to being governor. So, 100 points for

Chuck and -500 points for Axe. If the opposite happens, and Chuck leaves Axe alone but Axe

is still seeking revenge, Chuck may also end up in jail, and Axe’s ego will be satiated.

100 points to Axe, -500 points to Chuck. And if they both keep sabotaging each other, sure

they may get the satisfaction of revenge occasionally, but neither of them is particular happy; maybe

-100 points to each?

Axe and Chuck both choose “defect” instead of “cooperate” and ultimately enter a

downward spiral as a result. Wendy kicks Chuck out of the house after he spied on her notes,

and Axe’s legal troubles contribute to him eventually lose Lara. Axe has to give up his

ability to trade, and Chuck faces the prospect of going to jail as a result of his need to

get the upper hand on Axe.

The only resolution comes when the two reach an impasse. Enter the Ice Juice scandal. Chuck

finds out his father and friend Ira are going to invest in an IPO for a company called Ice

Juice and leaks that information knowing Axe will manipulate the stock to get back at Chuck.

So Axe fakes a lysteria outbreak to tank the stock, which is just what Chuck wanted to

happen. Axelrod will go to jail for manipulating the Ice Juice stock. But Chuck’s wife Wendy

shorted the Ice Juice stock, making it look like she, and her husband, benefited from

the stock manipulation.

"Mafee, it's Wendy Rhoades. The Ice Juice short. How do I get a piece of that?"

And since Chuck has the evidence that incriminates Axelrod for Ice Juice, they’re both stuck.

Either one of them getting revenge means they both go to jail. They both reach a cooperative

conclusion that isn’t great, but certainly better than their protracted war. With the

help of Wendy, they both have to give up their egos, but avoid jail time as a result.

Here’s why this all matters: Billions illustrated the shortcomings of living life like it’s

some kind of hyper rational game. Early in the series, Sacker’s father has this conversation

with Connerty:

"Principle doesn't usually go away all at once. It's a - uh - creeping erosion."

For game theorists, or just hyper-rational decision makers, life becomes a set of strategic

decisions to win the game, or optimize your outcomes. But just as the game slowly makes

Chuck lose everything he has, other characters slowly lose all sense of principle

“This business makes liars of all eventually.”

Perhaps the best example of this erosion lies with Taylor, an outsider intern at Axe Capitol

who quickly climbs their way to being Axe’s protege. Taylor has an acute understanding

of game theory, and used it to crush their opponents in poker, but eventually realized

that their love of winning and empathy were incompatible.

"Can I convince you to try one more time ... to play?"

"I'd prefer not to. That kind of competition made me sick. It literally brought on feelings

of malaise."

For Axe, part of Taylor’s value lies in the fact that they’re not playing the same

game as all the other traders. They’re an outsider.

"You see things differently, that’s an edge."

But once Taylor join Axe full-time, we slowly see how a person once involved in Occupy Wall

St:

"Active in Occupy Wall Street during their college years."

"So there's hope that this person may still have a heart."

Can become as cruel and manipulative as Axe

"Oh no. Taylor told you not to give me the raise, so that I'd be dissatisfied and go

with them. That's pretty sound from a game theory perspective."

A person Connerty once thought could be an ally eventually rebuffs him entirely.

"We're done here."

Taylor eventually betrays even Axe, because loyalty didn’t just add up in their long-term

calculus.

So how do you escape “the game,” so to speak? You go meta. This game outside the

game comes front and center with Wendy:

"What do you do when there’s no play to make, when no matter what you choose it will

end in disaster."

"Classic double bind. There’s a zen koan where the teacher holds the stick. He says

to his student if you tell me this stick is real, I will beat you with it. If you tell

me it is not real, I will beat with you it. If you say nothing, I will beat you with it.

And so, the student reaches out, grabs the stick, and breaks it. If the situation is

untenable Mrs. Rhoades, you break that f*****g stick."

The game, so far, has been Chuck and Axe in a revenge spiral, with Wendy stuck in between.

Instead, Wendy reframes it not as a zero-sum game between two rivals, but a cooperative

game of which she is the mediator.

"How do I know I can trust him?" "How do I know I can trust HIM?"

"Trust ME."

So is game theory a tool for us to hack our lives? To get what we want when we want? Or

should we be cautious of how the games we play can change us to the core.

Let us know in the comments and big shoutout to Showtime for sponsoring this video. Be

sure to check out Season 4 of Billions on Showtime starting March 17th. Thanks for watching.

Peace!