Nick Szabo, Small-game fallacies
- “A small-game fallacy occurs when game theorists, economists, or others trying to apply game-theoretic or microeconomic techniques to real-world problems, posit a simple and thus cognizable, interaction, under a very limited and precise set of rules, whereas real-world analogous situations take place within longer-term and vastly more complicated games with many more players: ‘The games of life’. Interactions between small games and large games infect most works of game theory, and much of microeconomics, often rendering such analyses useless or worse than useless as a guide for how the ‘players’ will behave in real circumstances. These fallacies tend to be particularly egregious when ‘economic imperialists’ try to apply the techniques of economics to domains beyond the traditional efficient-markets domain of economics, attempting to bring economic theory to bear to describe law, politics, security protocols, or a wide variety of other institutions that behave very differently from efficient markets.”
- “Most studies in experimental economics suffer from small-game/large-game effects. Unless these experiments are very securely anonymized, in a way the players actually trust, in a way the players have learned to adapt to, overriding their moral instincts—an extremely rare circumstance, despite many efforts to achieve this—large-game effects quickly creep in, rendering the results often very misleading, sometimes practically the opposite of the actual behavior of people in analogous real-life situations. A common example: it may be narrowly rational and in accord with theory to ‘cheat’, ‘betray’, or otherwise play a narrowly selfish game, but if the players may be interacting with each other after the experimenters’ game is over, the perceived or actual reputational effects in the larger ‘games of life’, ongoing between the players in subsequent weeks or years, may easily exceed the meager rewards doled out by the experimenters to act selfishly in the small game. Even if the players can somehow be convinced that they will remain complete strangers to each other indefinitely into the future, our moral instincts generally evolved to play larger ‘games of life’, not one-off games, nor anonymous games, nor games with pseudonyms of strictly limited duration, with the result behaving according to theory must be learned: our default behavior is very different.”
- “A related error is the pure-information fallacy: treating an economic institution purely as an information system, accounting only for market-proximate incentives to contribute information via trading decisions, while neglecting how that market necessarily also changes players’ incentives to act outside of that market. For example, a currently popular view of proposition bets, the ‘prediction markets’ view, often treats prop bets or idea futures as purely information-distribution mechanisms, with the only incentives supposed as the benign incentive to profit by adding useful information to the market. This fails to take into account the incentives such markets create to act differently *outside* the market. A ‘prediction market’ is always also one that changes incentives outside that market: a prediction market automatically creates parallel incentives to bring about the predicted event. For example a prediction market on a certain person’s death is also an assassination market. Which is why a pre-Gulf-War-II DARPA-sponsored experimental “prediction market” included a prop bet on Saddam Hussein’s death, but excluded such trading on any other, more politically correct world leaders. A sufficiently large market predicting an individual’s death is also, necessarily, an assassination market, and similarly other ‘prediction’ markets are also *act* markets, changing incentives to act outside that Market to bring about the predicted events.“
Additional
That DARPA-sponsored prediction market Szabo mentions is the FutureMAP one, where the goal was to improve upon any current intelligence surrounding an environment.