Prisoner’s Dilemma Present in Hungarian Bank Strategies
Over the last couple weeks we have been discussing the fundamentals of game theory. Game theory is the study of situations in which decision-makers interact with one another, and in which each participants payoffs are not solely based on his or her decisions but on the decisions made by all of the players in the game. One of the most common examples of game theory is the prisoner’s dilemma. The prisoner’s dilemma is normally set-up with the story of two criminals that are being interrogated in separate rooms. They know that if they confess and the other does not they will be let-off while the other criminal will have to serve a significant amount of time. On the other hand, if both confess then they will serve a decent amount of time, but not as much as if they had not confessed and the other had. Lastly, if neither confesses they can both get off will little punishment. While it seems like it would make the most for both prisoners to not confess – yielding little punishment for both – this is not actually the equilibrium that takes place. This is because as a self-interested player if you think the other prisoner is not going to confess, by confessing you get let-off instead of having to get a little punishment. However, because both prisoners would have this thought process, it turns out that rational players that do not collude with each other both end up confessing – resulting in a decent amount of time in jail.
This idea might seem to be limited to a very specific situation where two criminals get caught, but in reality the analysis used to look at this game can be used to evaluate other scenarios. This scenario is currently playing out in the loan market for Hungarian banks. Right now, there is a proposal that is in the process of becoming a law that would allow borrowers to pay off their debt in one shot at a significantly lower rate than the market is calling for. This presents a prisoners dilemma scenario because it is advantageous for debtors of people will available funds to capitalize on this situation. However, banks that participate will almost certainly take a loss if they participate; unfortunately, if they choose not to allow people to take advantage of these low interest rates, then they risk losing market share to the banks that do. This is a clear prisoners dilemma because the bank that confesses, or gives in and starts forint lending, will gain a significant advantage over the other banks as they gain market share. But, if all the banks offer the loans no one will make extreme market share advances, but all will take losses through the low exchange rate loans. Effectively, all that confess will get some losses, but ultimately, not as much losses as if they refuse to give the loans while other banks offer them. But in the end, it would be most advantageous for all of the banks to group together and not offer the loans. This way no one will lose market share because of this, while none will take losses.
http://www.portfolio.hu/en/economy/hungarian_banks_face_prisoners_dilemma.22920.html