Game Theory and Reminbi Appreciation
According to the game theory, human make unfavorable decision instead of the most optimal decision. This is because a person’s decision or outcome not only depends on one’s decision but also on the choices made by others. “Prisoner’s dilemma” is the one of the most well known examples of game theory. When two prisoners A and B are interrogated in separate rooms with options:
- If only one prisoner confess, the one who confesses get released while one who did not confess live in jail for 10 years
- If both confess, both live in prison for 4 years
- If both not confess, both live in prison for a year
both prisoners will confess. If we look at the options, not confessing is obviously the best option for both prisoners. However, when we interpret from individual’s view, it is not. Let’s assume that the other did not confess. If I confess, I get released while if I do not confess, I have to live in jail for a year. On the other hand, if the other confessed, confessing is still the best option because I only get to live in jail for 4 years instead of 10 years if I confess. Thus, looking at from my view, confessing is the best option because not confessing possesses more risks. Because the other thinks in the same way, the percentage of other will confessing gets bigger. Therefore, people tend to make an irrational decisions rather than rational decisions.
This phenomenon can be easily found in real life. For instance, appreciation on renminbi (Chinese currency) is an issue. The US is demanding China to appreciate renminbi in order to stabilize the economy. China has two options: accepting or rejecting. From China’s point of view, there is nothing China can gain. When they appreciate renminbi, profit from export decreases and unemployment rate increases. However, China cannot reject appreciating renminbi because that can hurts the US economy, eventually affecting China, as the US is the country that imports China’s product the most. This problem is quite different from prisoner’s dilemma as there are no absolutely good or bad choices. However, this shows that although the decision might not be the best choice, people actually make unfavorable decisions as their outcome depends on choices made by others as well.
Sources:
http://www.nytimes.com/2012/05/04/business/global/us-presses-china-on-its-currency.html?_r=1&gwh=F800D4862DAE056DB637C35CB925B2B4