Game Theory applied to the Greek Debt Crisis
http://www.bbc.com/news/magazine-33254857
This interesting article starts out describing the Greek Finance Minister Yanis Varoufakis expertise in Game Theory. Essentially, as described in class, game theory uses games to study behavior and to make decisions. The author of the BBC article, Marcus Miller, wants to see if that will be a predictor of the Eurozone Negotiations for a bailout. Miller connects the possibility of Greece defaulting on its debts to the simple and renown example of Game Theory, Prisoner’s Dilemma (PD). In class, the professors mentioned that the best course of action for both of the prisoners is to confess. As a result, Miller speculates that Greece’s financial troubles could end unfortunately like PD. This greek situation also resembles Game Theory because just like PD, the outcomes for the “players” (Greece and the rest of the Eurozone) depend on the actions of one another. As the article continues, Miller begins to describe a hypothetical payoff matrix that Yanis could use.
Miller goes on to describe the different situations at play in this debate. If Greece moves first and tries to completely avoid the forthcoming default on debts, Greece is content. As a result, Greece receives a payoff of 1 Now, on the other hand, the eurozone will respond differently. According to Miller the Eurozone would take a loss “on holdings of greek debt”. Therefore, they will get a 3/4 payoff score because they do sustain some losses even though the Eurozone would be intact implying that overall payoff is (1,3/4). On the other hand, there would be a different outcome if the Eurozone moved first and rejected the plan. There could be two possibilities, 1. Greek would leave the Eurozone and the other’s would be ok. 2. Greece leaves the Eurozone and the Eurozone collapses. The first would be terrible for Greece and well off for the Eurozone (Payoff Score: (0,1)) while the second would leave both players worse off (Payoff Score: (0,0)).
After reading this article, I was very surprised that game theory can be used for something as important as resolving a debt crisis. This directly correlates to what we have been learning in class in the last week or so. We looked at payoffs, payoff matrices, and how players respond to each other. In class, we looked at many different examples of how Game Theory can be used, and it is interesting that even countries can be “players” in a game. Although this debt crisis could be resolved utilizing Game Theory, I do not believe it is the most effective way of handling the situation because of multiple external factors outside of the players’ control. I think, though, that regardless it would still be sensible for both parties to come to a reasonable agreement. And even though the Eurozone may sustain some losses, they should definitely agree to a less stringent bailout plan. Hopefully, in the end, they come to a reasonable decision and do not end up and avoid the worst possible situation for both team members.