Skip to main content



Game Theory and the Greek Debt Crisis

In 2015 Greece was going through a major debt crisis which was severely affecting both themselves and the European Union as a whole. During that time when Greece and the European Union were trying to handle this growing crisis, BBC News put out an article that related this situation to game theory and the Prisoner’s Dilemma. As discussed in class, the Prisoner’s Dilemma is a famous game where there are two prisoners who can either confess or stay silent about a crime. However they are not allowed to communicate with each other. If both prisoners stay silent they will each get 1 year in prison. If both prisoners confess, they will each get 10 years in prisoner. If one prisoner confesses and the other remains silent, the prisoner that confessed will get 0 years in prison while the other will get 20 years.

In relation to the Greek Debt Crisis, there are also 2 players which include Greece and the rest of the European Union. There are different types of repercussions for both parties based on how Greece decides to address its debt. Greece has two options. The country could either default on all of its debt, or it could propose a financial stability plan that would help ease the debt. If the country proposed a plan and it is accepted by Europe, there will be a payoff of 1 for Greece as they will remain as a part of the European Union and a payoff of 3/4 for Europe as they would still have some losses on their holdings in Greek debt. If Greece defaults on its debt by choice or if they’re forced to default because their plan is rejected by Europe, there are actually two possible payoff outcomes of this default. Firstly Greece could exit the European Union and allow the EU to continue which would give Greece a payoff of 0 and the European Union a payoff of 1. Secondly Greece could exit the European Union and the entire EU could collapse, which would give both parties a payoff of 0. One could average these two scenarios together to get an average payoff for the two parties given Greece’s default on its debts. This would make the average payoff for Greece to be 0 and the average payoff for the European Union to be 1/2. You can see that the best payoff for both parties would be in the first scenario where Greece would formulate a financial stability plan. This game interestingly is dissimilar to the Prisoner’s Dilemma because both parties can end up well off. Both parties also have the opportunity to communicate with each other and make a decision together, which is also not allowed in the Prisoner’s Dilemma. Overall it was interesting to see how the game theory that we discussed in class could be related to one of the biggest financial stories of the decade.

http://www.bbc.co.uk/news/magazine-33254857

 

Comments

Leave a Reply

Blogging Calendar

September 2016
M T W T F S S
 1234
567891011
12131415161718
19202122232425
2627282930  

Archives