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Monday, 16 February 2015

The Game Theory - macro and micro

Last Friday the Financial Times (FT), my favourite newspaper, mentioned an interesting fact with respect to the current negotiations between Greece and the EU about relaxing the conditions of the EU bailout loans to Greece. The newly appointed Greek Finance Minister used to be a university professor teaching his students about the economics Nobel Prize winning Game Theory.

But what kind of game are he and his eurozone colleagues playing? “The simplest way of thinking about it is a game of chicken,” says George Tsebelis, a professor of political science at the University of Michigan. The two sides resemble drivers heading for a single lane bridge from opposite directions. Each knows that if they swerve first, they will concede the bridge to the opponent. However, if neither swerves, the result will be a collision, and each hopes to intimidate the other by refusing to swerve. “In these scenarios, each side has an incentive to show he means business,” Mr Tsebelis says. Source: FT, Friday 13 February 2015.

Game theory is the study of strategic decision making. Specifically, it is "the study of mathematical models of conflict and cooperation between intelligent rational decision-makers". An alternative term suggested "as a more descriptive name for the discipline" is interactive decision theory. Game theory is mainly used in economics, political science, and psychology, as well as logic, computer science, and biology. The subject first addressed zero-sum games, such that one person's gains exactly equal net losses of the other participant or participants. Today, however, game theory applies to a wide range of behavioral relations, and has developed into an umbrella term for the logical side of decision science, including both humans and non-humans (e.g. computers, animals). Source: Wikipedia.

Remarkably, yesterday evening the same subject appeared while discussing my son's study results. 

My son has been complaining about school since he joined at 6. Ten years later he still says that it is boring. We never had his intelligence tested so I have no clue what his official IQ would be. Yet over the years many of his teachers have said that he is very intelligent but that he lacks the will to show it. His sister and I always worked hard for good grades. He didn't and still doesn't. The why escaped me until now.

In a similar discussion some years ago, he rhetorically asked me why he would obtain good grades when the bare minimum is sufficient for passing to the next level. Back then I assumed that his response was a mere "sign of the times". At that time I already made an implicit reference to risk management by arguing that higher grades at least provide a buffer. For 4 years in a row he passed to the next level though never with convincing grades. The last 2-3 years he only passed after a joint teacher discussion regarding his study behaviour and results. 

According to a recent letter of his school, his grades have now most likely become insufficient to pass to the next - and final - level which he admits but does not worry about. In his view he has a zero % chance to fail again next year. Moreover, despite missing a full year of future earning capacity, he does not value his wasted time. He may even consider going to university after graduation.

Yesterday it appeared to me that he - either consciously or subconsciously - applies a rare form of extreme risk management combined with frivolity and high intelligence. The form may be rare but the combination of the 3 elements surely is not.

I told him that it looks like he is applying the Game Theory. He denies it's a game to him. I suppose it's more like an intellectual exercise to him. To me the difference is semantics. 

When departing I asked him whether he would mind mentioning this in my next blog. He didn't. I think he is looking forward to my analysis. Somehow I even feel proud of (t)his experiment.