A dangerous game

December 9, 2011 Leave a comment Go to comments

Let’s a imagine a simple game. Two people are put in a room with a button. They are told if one of them presses the button, they will get £100, but the other will get £10,000. The button only works for an indeterminate period of time and if you wait too long, it goes dead. It’s very easy to see how this could end up with neither person getting the money, because at any given point in time it is highly unlikely that the button is about to go dead; so, at any given moment it seems best to wait for the other person to press it. Lo and behold, eventually the button goes dead*.

Now imagine another game. It’s exactly the same, except that if the button goes dead, then both players lose all their savings and their jobs. Only a crazy person would wait for the other person to press the button. But the other guy knows that too. So if you can convince the other guy that you are prepared to be crazy, then you can get them to press the button. But he knows this as well, so if you start making crazy noises the most rational thing for him to conclude is that you are, in fact, not crazy but merely pretending to be. You can’t get the other person to press the button.

In the Euro-version of this game currently playing out in Brussels, Germany is the person pretending to be crazy. They want everyone else to press the button and bow to German pressure for a more fiscally integrated Europe. They also seem to think they will be able to tell if the button is about to go dead.

But they can’t. No one knows when a catastrophic run on European financial institutions could begin. Believing that you can manage this crisis in order to achieve what you believe is to the mutual long-run advantage of all concerned is unbelievably dangerous. But the logic of the game is brutal – everyone agrees that failing to press the button before it goes dead would be a catastrophe, but at any given point in time it will never seem like the right thing to do for any individual player. The issue here is, I think, not a lack of understanding of what it would take to prevent a European financial crisis (at least in the short-term), but rather that the crisis is seen as potential source of leverage for accomplishing other goals. This is hardball politics.

The debt ceiling showdown in the US worked out in the end, insofar as the button got pressed – but there was also a pretty good idea of when zero-hour would hit. For this crisis, that is simply not the case. Oh, and instead of two parties at the table, you have seventeen.

God help us all.

*If there has ever been any research (remember Cowen’s first law) I could possibly understand as to game-theoretical situations with time-dependent payoffs, or if you wanted to explain it to me, I sure would be interested to hear about it

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