Game Theory Suggests Bad Decision Making

Game theory might sound like something kids would know more about than their parents, but as Jeff Brannon explains, it involves something entirely different – something that small business owners need to understand. “Game theory is the study of mathematical models between intelligent, rational decision makers,” Brannon said.

Brannon, who operates Solve Capital Group in Irvine and provides financing to small businesses throughout Southern California, believes small business owners can leverage game theory for their benefit.

“A fundamental assumption in game theory – and in small business lending, for that matter – is that participants/borrowers act rationally,” he said. “In actuality, people in both sample sets act very irrationally. We have banks, which are cost effective yet slow – and we have merchant cash advance companies, which are expensive but quick.” He offers a typical small business lending dilemma.

“ABC Machining needs money. Do they 1.) apply for an expensive loan that can be obtained quickly, or 2.) apply for an affordable loan that takes a long time to obtain? Option 1 offers fast funding, but the borrower will most likely lose money because of the cost of capital. Option 2 may take longer, but it will be more affordable for the borrower (therefore, he will have an easier time paying it back).

Game theory supports the idea that the business owner will act irrationally, taking the fast money that will cost him more in the long run. He thinks he should take the loan he can get right away, and ‘figure it out’ from there in terms of how he can afford to pay it back. Often, that fast money loan is from an online lender that doesn’t understand his business and what he needs the money for – and the rates are sky high, making it nearly impossible for him to pay it back on any reasonable timetable.”

Brannon suggests that his business, Solve Capital Group, operates in the middle of the two extremes. “We’re not Option A or Option B,” Brannon says. “We target the middle section of businesses that have good credit and a good story, but are not bankable. We are a direct lender with a process that takes approximately one week; it’s not overnight, but it’s fast enough for most business’s needs.” He also states that Solve Capital Group offers “in the middle” rates that business owners are more likely to afford, making them more likely to pay back their loans in a timely manner.

“They’re definitely not bank rates, but definitely not merchant cash advance rates either,” he says.

Brannon recommends that small business owners in the Inland Empire contact him as soon as a need for capital arises. “It’s best if we have time to get a head start on it,” he says. “The more time you have to weight options, the higher the likelihood of identifying the right financial product for your business.”