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Political donations, Warren Buffett, and Game Theory

In light of the upcoming election in 2012 there has been significant media coverage on campaign fundraisers and which party prominent businessmen have chosen to donate to.  In this post I plan to analyze Warren Buffet’s decision to donate to Barack Obama.  Buffett’s support of Obama is especially fascinating when the issue of Wall Street regulation is considered as Buffett has substantial stakes in investment banks.  While issues of financial policy and regulation on Wall Street are obviously very complex, for the purpose of this discussion I will make some generalizations. Let’s assume that a Republican candidate will be for deregulation, which will be financially beneficial for banks (at least in the short-term), and subsequently beneficial for Buffett; let’s also assume that Obama will be for increased regulation, which will be financially detrimental for banks (at least in the short-term), and subsequently detrimental for Buffett.  However, the crucial caveat is that we will assume (cynically) that if Buffett supports Obama then Obama will see to it that Buffett won’t be financially affected by any regulation. Finally, let’s assume (again, cynically) that Buffett doesn’t care about politics but strictly about what’s financially beneficial for him.  With these assumptions we can see how supporting Obama is Buffett’s strictly dominant strategy.

The two players in this game are Warren Buffett and the American public. Their choices are whether to support the Republican or Democratic candidate.  The payoffs will reflect whether the outcome is financially beneficial (+) or detrimental (-) to Buffett. We will ignore the payoff for the American people for the time being.  Given the assumption above, our game should look like this:

American Public

Warren Buffett Obama Republican
Obama (+) (+)
Republican (-) (+)

Here we can see that supporting Obama is Buffett’s strictly dominant strategy.  If he supports Obama and American Public supports Obama, then it will be beneficial for him because he will be financially immune from any regulation (see caveat above). If he supports Obama and the American Public supports a Republican, then it will still be beneficial because Republicans will deregulate.  Buffett’s hedge (which isn’t his investing style) is clearly the strictly dominant strategy in this example.

http://dealbook.nytimes.com/2011/10/02/others-go-but-buffett-stays-on-side-of-president/

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