Friday, February 13, 2015

What happens when you play "chicken" with a game theorist?

Greece's new finance minister is a game theorist, engaged in a game of chicken with the rest of the European Union.  Right now we have two teenage boys driving cars straight at one another, hoping the other swerves.

As anyone who has read Chapter 16 knows, to win the game of chicken, you commit to going straight, and rely on the other party's self interest to make him swerve.  But what happens when each party tries to commit to going straight?

These games typically involve each player trying to influence the final outcome until the very end, when one gives way. 
But game theorists warn that in real life, the end game may be one in which neither side concedes. This could happen if each party has committed so much to its uncompromising position, that it becomes impossible for it to change it.

The non-strategic view of bargaining (the alternatives to agreement determine the terms of agreement) offers further insight:

However, opting for forgiveness risks creating dangerous incentives for other countries to act in the same way as Athens. “Germany may decide that if the eurozone does not punish Greece, it will have problems with other countries such as Spain and Italy,” says Roger Myerson, a Nobel-winning economist at the University of Chicago. 

Mr Varoufakis should therefore try to convince Germany that Athens’ situation is unique and that other eurozone countries will not seek debt relief as a result, he says. In doing so, he would follow the illustrious precedent of the citizens of Melos, to whom Athens, during the Peloponnesian war between Athens and Sparta, gave the choice of surrendering or facing annihilation.

“The Melians sought to argue that they were different and that sparing them would not set a dangerous precedent vis-à-vis other islands,” says Mr Myerson.

The problem with this strategy, however, is that the other player may choose to build a reputation for toughness. This is what Athens opted for — it laid siege to the island and starved the inhabitants into submission.

10 comments:

  1. The European Union is hoping to reach an agreement with Greece on February 16. The prime minister of Greece, Alexis Tsipras, is reassuring his counterparts in Germany and France that his Government is open to negotiation. The negotiations that will ensue probably for the next 4 to 6 months, and beyond this year, must take into consideration the credibility of the newly elected Greek Government in the eyes of their electorate, as they may want to take steps, or not, in the direction of re-negotiating the Greek debt and the conditions of the past agreement with ECB/ FMI/ European Union: the conditions for the loan were basically several measures of austerity and European regulations imposed on Greece’s exports-import activities and their expenses. It is worth mentioning that France, Holland (Netherlands) and other European banks are behind German banks in their view of looking for a solution, while treading lightly on the political aspects of the Greek demands: Yanis Varoufakis is called the “Marxist rock-star” of the Greek Government in French and Belgian news journals. The Greek Government successful election campaign was built on the electorate dissatisfaction with not only the austerity measures, but with the German-France dominance of the European dialogue, rooted back to a strong socialist party very popular in Greece. What was the deal?- the Greek debt is 315 million euros, and the agreement with the previous more conservative Greek Government was to refinance 10 million euros by February 11, 2015. The only solution to the crisis is to allow an extension to the contract. Another solution is to make the debt permanent, with an “interest rate indexed on the growth” (Netter, 2015). This “shock treatment of the Troika” (ECB, FMI and European Union) was accepted by other euro or future euro-zone countries, like Portugal, Spain, Slovenia, Latvia and Romania, countries that don’t appreciate if Troika would decide for an exception from austerity measures for Greece. (Ducourtieux, 2015).
    References:
    Jean-Jacques Netter. 2015. Dette grecque : la rock star marxiste de la finance n’a pas encore gagné. Dans l'œil des marches. www. atlantico.fr
    Cécile Ducourtieux. 2015. L’Europe espère aboutir à un accord avec la Grèce le 16 février. Le Monde.fr.

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  2. The European Union is hoping to reach an agreement with Greece on February 16. The prime minister of Greece, Alexis Tsipras, is reassuring his counterparts in Germany and France that his Government is open to negotiation. The negotiations that will ensue probably for the next 4 to 6 months, and beyond this year, must take into consideration the credibility of the newly elected Greek Government in the eyes of their electorate, as they may want to take steps, or not, in the direction of re-negotiating the Greek debt and the conditions of the past agreement with ECB/ FMI/ European Union: the conditions for the loan were basically several measures of austerity and European regulations imposed on Greece’s exports-import activities and their expenses. It is worth mentioning that France, Holland (Netherlands) and other European banks are behind German banks in their view of looking for a solution, while treading lightly on the political aspects of the Greek demands: Yanis Varoufakis is called the “Marxist rock-star” of the Greek Government in French and Belgian news journals. The Greek Government successful election campaign was built on the electorate dissatisfaction with not only the austerity measures, but with the German-France dominance of the European dialogue, rooted back to a strong socialist party very popular in Greece. What was the deal?- the Greek debt is 315 million euros, and the agreement with the previous more conservative Greek Government was to refinance 10 million euros by February 11, 2015. The only solution to the crisis is to allow an extension to the contract. Another solution is to make the debt permanent, with an “interest rate indexed on the growth” (Netter, 2015). This “shock treatment of the Troika” (ECB, FMI and European Union) was accepted by other euro or future euro-zone countries, like Portugal, Spain, Slovenia, Latvia and Romania, countries that don’t appreciate if Troika would decide for an exception from austerity measures for Greece. (Ducourtieux, 2015).
    References:
    Jean-Jacques Netter. 2015. Dette grecque : la rock star marxiste de la finance n’a pas encore gagné. Dans l'œil des marches. www. atlantico.fr
    Cécile Ducourtieux. 2015. L’Europe espère aboutir à un accord avec la Grèce le 16 février. Le Monde.fr.

    ReplyDelete
  3. Game Theory is the study of strategic interactions economists uses it understanding pricing decisions in companies. For Greece, this means that it has to commit to a position and make sure that their commitment is understood. “Greece will no longer co-operate with the "troika" of international lenders that has overseen its four-year bailout programme, the country's finance minister said” (Newstex 2015). “Greece would not accept an extension of its EU bailout, which expires at the end of February, and without which Greek banks could be shut off from European Central Bank funding” (Newstex 2015). Gauntlet thrown.

    “German finance minister, warned Athens… against trying to "blackmail" Germany with its financial demands” (Newstex 2015). “The most immediate repercussions, however, will be felt in Spain. Pablo Iglesias, the leader of Podemos, is banking on Greece to push support for his anti-austerity platform to an all-time high” (Baboulias 2015). However, according to Baboulias, the real measure of success for Greece will not be success in renegotiating the national debt but their success in tackling inequality.

    References:
    - Baboulias, Y. (2015, Jan). Greeks pin their hopes on change. New Statesman, 144, 16.
    - Phil's stock world: Greece will not accept bailout extension or deal with "rottenly constructed" troika; mish's game theory math (2015). Chatham: Newstex.

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  4. Data Recovery services for hard disk drives, SSD, RAID, NAS, USB flash drives, memory cards and mobile phones in New Zealand. Lab based in Auckland. data recovery auckland

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  5. Game-theory concepts such as “playing chicken” or “war of attrition” have already entered public discourse over the government shutdown and debt limit struggle. They suggest a negotiation between two major players, with Speaker Boehner on one side, and President Obama on the other. The set-up is reminiscent of the Cuban missile crisis with the main question being who blinks first?
    These are useful perspectives, but they miss important aspects of the problem. The main difficulty is that, if you are, say, the President, you are not negotiating with one person, but with groups of people—the House, the Senate, the political parties and factions—all those involved in making decisions under complicated rules and procedures. Moreover, the negotiators are politicians that respond to public opinion. Changes in public sentiment affect the political costs and benefits of compromise versus confrontations. If the public blames Republicans for a breakdown more than the Democrats, the Republican leadership’s bargaining position worsens. Political negotiations are always also battles over public opinion, which means, for better or worse, the media also play a significant part in the end-game.
    Long-drawn out negotiations are intrinsic to the U.S. system of government. They often result in compromise solutions that prove to be stable, though policy change can be slow. During the times when urgent action is needed, as we see now with both the government shutdown and the debt limit issues in play, this becomes a liability.
    Despite the high stakes, there is no assurance that a deal can be struck, but changes in incentives will help. For that to happen, the political costs of failure must continue to increase. It is here that shifts in public opinion can play a crucial role. A war of attrition is starting to turn into a battle over public opinion. Game theory can help us understand these dynamics, but the game is still in play.
    Reference:
    Diermeier, D. (2013, Oct 11). How Game Theory Can Help Make Sense Of The Government Shutdown. Retrieved from Business Insider: This article originally appeared at Kellogg School of Management at Northwestern. Copyright 2013.

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    Replies
    1. Dan, I think you hit the nail on the head when it comes to game theory. Table 16.1 (pg. 188) in Managerial Economics (Froeb, L., McCann, B., Shor, M., & Ward, M., 2014) introduces us to the payoffs in negotiating with two parties. Yet you point out the real world is much more complex, with many other players in the shadows making demands with agendas that may or may not support the best strategy that one would write for a textbook. I’m sure that Greece’s new finance minsister has been able to consider the variables behind his negotiations. I see a possible correlation between multiple games of chicken, such as four cars coming to an intersection. The hope is that one will have a first mover advantage executed in time to prevent chaos.
      I like to look at the demise of Hostess as a great example of when multiple cars commit and crash. Susan Adams wrote a piece that shed light on the labor dispute. The final straw was between Hostess and the baker’s union, but was complicated by the Teamsters unwilling to negotiate and hedge funds unwilling to fund in that adverse climate (Adams, S., 2012). All parties opted for self interest and in the end everyone held nothing but an empty twinkies box.

      Froeb, L., McCann, B., Shor, M., & Ward, M. (2014). Managerial economics: A problem solving approach (3rd ed.). Australia: South-Western Cengage Learning.
      Adams, S. (2012). Refer to (http://www.forbes.com/sites/susanadams/2012/11/21/why-hostess-had-to-die/). Accessed on 4-29-2015

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  6. The housing bubble has been looked at from several points of view – greed, stupidity, pushing the limits and illegal. Let’s look at the housing bubble as a game theory. Home prices historically rise over time, similar to the stock market. We look at the stock market several times a day, and housing price trends every month, quarter of maybe only when a similar house in the neighborhood sold. We see the change in housing prices as a barometer of how we are doing with our investment (our home). The housing bubble sent many people into a tail spin because they played the wrong side of the game. With the hopes that prices would keep moving up and they would sell and recoup all the expense of getting in over their heads. Also the group that played the interest game with their mortgages. The thought of selling a house for profit, or refinance before the rate increase only to find that the same bank would not refinance the same house a couple of years later.

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  7. The dilemma that the Greek politicians have is the cause and effect from the populist movement against the austere movement that will follow from agreement to Germany’s requirement for Greek financial reform. The Germans are negotiation with both stick in carrot whereas the stick is the “non-bailout” and the carrot is the bailout with the guarantee of Greek financial reform. If the Greek politicians agree to the reform, it will cause the populist anti-austerity movement to vote out the Greek politicians who are in favor with the austerity agreement. The populist anti-austerity action will ultimately place Germany back at square one with the possibility of the original Greek loan default unresolved and serve as an example to politicians of other borrowing nations that if they also agree to austerity measures than they will be affected politically. Germany’s strategy of playing chicken may cause a crashing domino effect with the other borrowers so an alternative could be a modification for the current loan with extensions that will offset a greater confrontational condition.

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  9. Chapter 16

    WASHINGTON — “Two weeks ago, Donald J. Trump said he could live with a nuclear-armed Japan and South Korea if it meant they could defend themselves against North Korea without American aid. “I’m not sure that would be a bad thing for us,” he said.
    Since then he has changed his tune. After Japanese and South Korean officials raised fears of an Asian arms race, and President Obama ridiculed his remark, Mr. Trump began to say he did not actually want the two countries to obtain nuclear weapons — but that, because of American weakness, “at some point it could happen anyway. “It was not the first time Mr. Trump has hastily added deflating caveats to his headline-grabbing trial balloons. In a debate a month ago, he declared himself in favor of torture if it would extract information from terrorists, then issued a statement saying he would respect the law, then followed it up by saying that the law must be changed. In a television interview on March 30, he suggested that women who have illegal abortions should face “some form of punishment,” then reversed himself in another carefully worded statement, then suggested in an interview that abortion should remain legal, then effectively clicked “undo” with another written statement. In each case, Mr. Trump appeared to be seeking a sort of shelter somewhere between his original remark and the wave of objections it set off. ( The New York Times)


    This article points to the constant pivoting of presidential candidate Donald Trump on a number of issues. The is a three point course with each of the situations listed he first takes a particular stance, then he slightly adjusts it and then he does a complete about face. According to Froeb ”A player can gain bigger share of the \“pie” by 1) changing a simultaneous-move game into a sequential- move game with a first-mover advantage; or by 2) committing to a position”. It Is here that we can see Mr. Trump’s intention to gain the bigger share of the potential audience interest by being a first mover initiating an opinion to a stance but later on for whatever reason he then makes another move and commits to a different position. It is therefore clear that he is bargaining his position with the potential voters based on which position has the greater buy in, the position that garners him the most support, he does not commit to a position in the truer sense as he is always willing to change positions depending on the outcry of the public. According to the Nash equilibrium it is important that players know how to adjust strategy in the game to their own advantage, in this article it exemplifies that Mr. Trump Is learning to adjust his strategies to what he perceives to be his best advantage Froeb states “When players act rationally, optimally, and in their own self-interest, it’s possible to compute the likely outcomes (equilibria) of games”. If all US presidential candidates act rationally, optimally and in their own self-interest, then its brings more competitive energy as they will try to anticipate each other’s next move.

    Retrieved from :http://www.nytimes.com/2016/04/10/us/politics/donald-trumps-trial-balloons-are-catching-up-with-him.html

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