Using Game Theory to Predict the Euro’s Future
http://www.nytimes.com/2012/07/24/business/global/using-game-theory-to-predict-the-euros-future.html?_r=1
Currently, economists around the world are trying to predict the outcome of the current European sovereign debt crisis., knowing the massive global implications of this crisis.
This article discusses how we can apply game theory to predict how the financial crisis will play out. It describes membership in the euro zone as “a zero-sum game, in which each state feels like a victim of its partner’s decisions.” Through this we can try to determine whether the euro zone debtors (Greece) or the creditors (Germany) might see economic interest in abandoning the euro first.
Foreign exchange strategists at Bank of America Merrill Lynch predict that while Germany and Greece would both stand to gain if Greece carried out its austerity program and Germany agreed to the issuance of bonds backed by the credit of the euro zone as a whole, neither is likely to choose that course because each would be better off without making a sacrifice. The article also describes what they predicted is the best option for other states in the euro zone such as Spain, Italy, Ireland and Finland.
I found the article to be an interesting read and a classic example of how game theory can be applied from small 2 player games with limited consequences to large games played among countries that can affect billions of lives. While game theory can help provide us with a better model of the situation, it requires us to assume that all parties behave rationally. Unfortunately, this means that these models and predictions must always be taken with a grain of salt because we cannot always assume rationality.
-M