Building the right team

Game theory applied to startups and people

Game theory is an interesting topic to economists and theorists. But it has more practical implications, more so that what most people would realize I might add. I think the mathematics behind it and the unattractive lengthy abstracts drive people away. I want to address a particular cornerstone in this post: Nash’s equilibrium and how it applies to startups as they build a team. So what is this equilibrium stuff anyways?

Equilibrium as a term itself refers to a state of balance. In human-based institutions1 this turns out to be the most optimal state from where we can make progress. John Nash won the Nobel Prize in Economics for his work on Nash’s equilibrium, let me explain what it is:

Nash’s equilibrium is the solution of a game involving two or more players in which each player is assumed to know the winning strategy of the other players. If everyone does as everyone else knows and no one changes their strategy, they can all arrive at the equilibrium block and they all win. No one playing the game has any motivation to change their strategy because they would end up losing and might cause other players to lose too.

Sow how does any of this apply to startups you ask? This becomes critical when building a team, I want to show this in a story mode with the following taken from a lovely blog post2

I previously worked at a financial services institution where I was growing restless. A colleague of mine, whom I respected very much, was in the same boat. Let’s call him Jim. Jim and I often talked about starting our own company to escape the BS and realize our full potential.

Then there was another one of our colleagues, whom I’ll refer to as TDB. I had referred TDB to my company because a good friend of mine had asked to as a favor. He didn’t have the right experience to be hired at this institution, but through my goodwill, he was hired. TDB never hesitated to cash in on my goodwill and often presented himself as a good friend of mine when the reality is that he is a friend of a friend. At the time, I didn’t mind, I had no reason to.

As Jim and I increasingly talked about our plans, TDB would tag along in these conversations and interject himself in our endeavor. I knew that I didn’t know TDB enough to want to go into business with him. That and as I got to know him more, he exposed himself more and more as a person with questionable character. At the same time, he was seemingly intelligent, and maybe his help wouldn’t be all that bad. TDB did his best to befriend Jim. Jim thought I was good friends with TDB as TDB always presented our relationship that way, so Jim gave TDB the benefit of doubt. The more I saw Jim with TDB, the more I thought Jim saw good qualities in TDB.

Through mutual respect between Jim and me, a positive feedback loop was created. The more I saw Jim and TDB in good rapport, the more I trusted TDB. The more Jim saw TDB and I get along, the more he trusted TDB. In the way which animal spirits create disastrous financial bubbles, TDB gained a lot of superficial respect from Jim and me by this positive feedback loop.

Fast forward another year or so, we’re co-founders of a startup. It’s a story I will tell later, but the cliff note version is that TDB single-handedly destroyed the startup twice. The first was salvageable, but the second was not.

Analyzing this situation from Nash’s Equilibrium, the author of this post and his friend Jim knew their strategy in the beginning: They were going to create this startup. They both unilaterally changed their strategy and that broke the assumption that they knew each other’s winning strategy. This came out as a disaster, just because they had changed their strategy no one arrived at the winning block.

Game theory is important. More so if you’re building a team. Please let me know what you thought of this post in the comments!

  1. Eric Reis defines a startup as a human institution designed to work in uncertain conditions. 

  2. This post was taken from this blog