The single most important question in any strategic situation is: is the pie fixed, or can it grow? The answer changes your entire strategy. And yet most people never ask the question — they default to competing when they should be cooperating, or they miss that someone else is playing a completely different game.
Game theory gives you three lenses for identifying the game you’re in: the type of game, the coordination problem, and the incentive structure.
Zero-Sum, Positive-Sum, and Negative-Sum
- Zero-sum games: One person’s gain is exactly another’s loss. Poker, litigation, sports — for me to win, you must lose.
- Positive-sum games: Both sides can gain. Trade, partnerships, knowledge-sharing — we can both win.
- Negative-sum games: Both sides lose. War, price wars, lawsuits — the fight itself destroys value.
Knowing which type you’re in determines whether you should compete, cooperate, or walk away entirely.
Where the Value Is
Trade between nations (positive-sum). When Japan makes electronics and Brazil grows coffee, both get more than if each tried to do everything. This is comparative advantage — the foundation of why trade creates wealth. When countries treat trade as zero-sum (tariff wars), they destroy value.
Startup equity (positive-sum). A founder giving 20% to an investor isn’t “losing” 20%. If the investment helps the company grow 10x, the founder’s 80% is worth far more than 100% of a smaller pie.
Knowledge sharing (positive-sum). When you teach someone what you know, you don’t lose the knowledge. Both parties gain. This is why open-source software, scientific publishing, and mentorship create enormous value.
Litigation (often negative-sum). Two companies spend $5M each in legal fees fighting over a $3M dispute. Regardless of who “wins,” both are worse off than if they’d settled.
Poker (zero-sum). The pot doesn’t grow because you play well. Your winnings are exactly someone else’s losses — minus the house rake, making it slightly negative-sum.
The Trap: Treating Positive-Sum as Zero-Sum
Many people default to zero-sum thinking:
- “If my colleague gets promoted, it hurts my chances” — often false. Growing companies create new roles.
- “If a competitor succeeds, it means I’m failing” — often false. Competitors can grow the market.
- “Negotiation is about extracting maximum value from the other side” — often counterproductive, especially in repeated interactions.
Munger, Buffett, and Dalio all seek positive-sum games. Their entire partnership philosophy is about finding situations where everyone wins. They avoid zero-sum battles like hostile takeovers and competitive bidding wars.
Naval Ravikant put it sharply: “Wealth is not a zero-sum game. Status is.”
Coordination Games and Schelling Points
Not every strategic problem is about competition. In a coordination game, players want to align — the challenge is how to converge on the same choice without communicating.
Thomas Schelling’s famous experiment: “You have to meet someone in New York City tomorrow. You can’t communicate beforehand. Where and when do you go?” Most people answered: Grand Central Station, noon. Not because it’s objectively the best answer, but because it’s the most obvious answer — the focal point.
These natural defaults are called Schelling points, and they emerge from:
- Prominence — what stands out (the tallest building, the round number)
- Convention — what has been done before (tradition, precedent)
- Cultural context — shared knowledge and defaults
- Simplicity — the easiest, most obvious option
Coordination in Practice
Technology standards. USB-C is becoming the universal charging standard. It doesn’t matter if another connector is technically better — what matters is that everyone uses the same one. Apple adopted USB-C not because Lightning was bad, but because the coordination benefits of a universal standard outweighed proprietary advantages.
Bitcoin as digital gold. Many cryptocurrencies could technically serve as a store of value, but Bitcoin’s first-mover status made it the focal point. It became the Schelling point for “digital gold.”
Round-number pricing. Prices cluster at $9.99, $49, $99 because round numbers are Schelling points. Sellers anchor to them because buyers expect them.
Driving on a side of the road. Left or right doesn’t matter — what matters is that everyone agrees. Sweden’s Dagen H (1967) switched the entire country from left to right in a single day.
The Strategic Implication
Creating a Schelling point gives you power. If you can establish the default — the “obvious” choice — others will coordinate around you. This is the logic of platform businesses and network effects.
Moving away from established Schelling points is hard. QWERTY keyboard layout may be suboptimal, but switching requires massive coordination. Incumbent advantage in coordination games is enormous.
Unlike the prisoner’s dilemma where communication doesn’t necessarily help, coordination games are solved by simply talking. This is why meetings, standards bodies, and industry consortiums exist.
Incentives Drive All Behavior
Charlie Munger’s most-repeated insight: “Show me the incentive and I’ll show you the outcome.” The structure of a game determines behavior more than the character, intelligence, or intentions of the players.
This is game theory’s most practical application. Instead of asking “why are people behaving badly?”, ask “what are the incentives?”
The Three Components
Every incentive structure has three components:
- What gets rewarded — People do more of this
- What gets punished — People do less of this
- What gets measured — People optimize for this
The gap between intended incentives and actual incentives is where most problems live.
Incentive Failures in the Wild
Wells Fargo fake accounts (2016). Employees were incentivized by aggressive sales targets — open X accounts per day or get fired. The incentive was to open accounts, not to serve customers. Result: millions of fake accounts. The employees weren’t uniquely corrupt; the incentive structure was.
Real estate agents. Agents earn a commission percentage on the sale price. On their own homes, they wait for higher offers. On your home, they push you to accept quickly — because their 3% share of a $10,000 price increase ($300) isn’t worth weeks of extra work. Same people, different incentives, different behavior.
The Cobra Effect. The British government in colonial India offered a bounty for dead cobras. People started breeding cobras to collect bounties. When the program was canceled, breeders released their now-worthless snakes. Net result: more cobras than before.
Stock buybacks vs. R&D. When CEO compensation is tied to earnings-per-share, they’re incentivized to buy back stock (inflating EPS) rather than invest in R&D. The incentive structure favors short-term financial engineering over long-term value creation.
The Diagnostic Test
When analyzing any situation, ask:
- What are the explicit rewards?
- What behavior actually gets rewarded (vs. intended)?
- Who benefits from the current structure?
- What would I do given these incentives?
- How could the incentive structure be redesigned?
If you’d do the same thing the “bad actors” are doing given their incentives, the problem is the system, not the people.
The Takeaway
Before you strategize, identify the game. Is the pie fixed or can it grow? Is the problem competition or coordination? And what incentives are actually driving behavior?
Munger and Buffett built their careers on getting these answers right: they seek positive-sum games, create Schelling points around their reputation, and obsess over incentive structures. The frameworks aren’t complicated — but the discipline to apply them consistently is rare.