# Dalton & Michael: What basic game theory teaches us about startups

**Author:** Dalton Caldwell, Michael Seibel
**Type:** Video
**URL:** https://www.ycombinator.com/library/Ib-dalton-michael-what-basic-game-theory-teaches-us-about-startups
**YouTube ID:** gUuQsMERjUc

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Dalton Caldwell and Michael Seibel discuss the problems with zero sum games within tech culture. Is your startup making
a positive impact on the world or are your business practices a net negative in society?

## Transcript

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 xero sub 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 so just to start with definitions please um a zero same 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 um a classic zero-sum game is we make a bet

and so say we bet you know 20 bucks something will happen um 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 whatever you gain i lose and it all equals that to 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 um you know

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 so we do the thing and then when it's all 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 you know made a bet versus built something and in one of those scenarios it was a we made something that last and the other one it was just a zero sum form entertainment

okay so the most common thing of course i even had to use it for the example is 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 it's wild like gambling is fun maybe not for everyone but

do you do you think what's what's your experience with this stuff i find that gambling i think it trips one of these things in everyone's brains that um 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 um 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 um 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 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 it it tends to kind of happen in these ways that aren't as good a lot 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 um i'm sure you have two 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 um making their entire living

by you know fooling other people more or less right well it's crazy because the 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 night in the 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 um unassuming normal americans

make a lot of money on the transactions um i think the the one example i read it was um 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 um you let people play these zero some 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 um 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 you know you use 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 like that's like a free market system like that's like that's okay like they 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 lived in we live in today was built by people who were playing positive some games so what it's 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 some 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 uh financial crisis uh the last financial crisis maybe the current one the the 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 it is yeah you know and you might as well buy margin because you'll 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 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 like i didn't do anything wrong why am i punished

and it's like like 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 some 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 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 um 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 um and you're how heavily levered it's rough so so let's make let's take this positive so again like we're seeing all the what is right side what's the what's the advice like how can you make sure what you're doing is positive some and like how can you build enduring value and not accidentally you know what's the move you know what dalton i 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 getting around you and you know it's funny because i 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 like 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 like something real i mean we're seeing this right now with a bunch of our startups um

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 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 that's a positive sound game yeah well we're done you know like the people where immediately the music stopped that that's rough like if you're that sensitive to like market conditions that um literally you don't have a company

anymore the minute the markets drop a lot of the founders to your point are actually that we work with 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 cons concerned about their legacy like they realize that making money and making impact um 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 be 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 their um duty and like raises kids and teaches them to do right and to work hard that person's in the building society group

um but there's actually 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 some things

and and if if that's the example if that's what you'd want your kid to do you probably should take that advice too is 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 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 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 positive sun

information like some 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 try to put your energy into interacting with positive some situations as much as you can and it'll

pay back in ways you can't even possibly imagine and the in the 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 some 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]

all right man great chatting dalton sounds good thanks [Music] [Music] you
