January 23, 2018

Who blinks first?

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Game theory has been very much in the news the past few weeks in relation to the attempted renegotiation of Greece’s EU bailout deal, and its related austerity measures.

It is, by now, a well known fact that Yanis Varoufakis (the Greek finance minister at the head of these negotiations) is a student of Game Theory and has even authored a book on the subject. So it comes as no surprise that his various efforts to change the deal with Europe has been compared to the theories. But is there any real comparison?

The Prisoners’ Dilemma shows us the decisions people make not only affect us, but also others. And that these decisions need to be made with reference to not only what is best for us, but on what decision the other party is likely to do.

Thinking only for ourselves gives us 2 options, rational or irrational choice. Thinking about others complicates it, as part of the outcome is out of our hands, but it is also intrinsically linked to what we do.

We can either stay quiet or confess. The outcome of the decision, however, is not so straightforward, because it depends on the other party. Can we trust them to do the rational thing (stay quiet) or will they be looking to their own self interest only.

People have choices. Economists often think people choose rationally to maximise their self-interests, including those with whom they interact. As presented, the Prisoners’ Dilemma game leads to some odd results; the prisoners choose to defect, unable to communicate and choose the worst, for them strategy – both confess, which is worst for both of them; or one confesses, the other doesn’t, which slightly better for the one who does not confess (released for lack of evidence), worse for the one who does confess.. The confessor goes to jail, and the non-confessor is released.

Their best strategy for both of them is to not-confess, and both are released for lack of convictable evidence.

For Greece and the EU they face a tough road ahead to renegotiate any part of the deal.  There is so much at stake for both parties and neither can be seen to back down.  For Greece to accept the austerity programme with no changes is political suicide certainly and perhaps an exit from the EU bringing with it problems for all the other nations, instability and political uncertainty; for the EU to accept changes brings into question all the other deals within the EU and instability for the union, widespread economic uncertainty and political upheaval.

Can Greece present the EU with a viable alternative?  Will the EU give them any room to manouvre – so far they haven’t flinched.  The extension hasn’t come with any of the benefits Greece wanted, it’s merely given them a little more time to pay back the money under the same conditions as before.

So, who will Blink first?  Time will tell.

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