Debt crisis game theory

This article was very interesting to me because it helped me visualize how the game theory would make sense in a larger political and economic model.

I am aware that the examples we examined in class were pretty simplistic, but I was still a bit surprised at how simplified the Greek debt crisis model was in this example. Moreover, when the options for Greece and the Eurozone were charted, the Nash equilibrium presented itself.

Greece choosing to offer a plan and Eurozone accepting the plan was the best choice for both players, and so there was a mutual best response. This article takes the theory that we talked about in class and applied it to a complex real world dilemma.

The Greek finance minister is an expert in game theory. Could this help predict how the Eurozone negotiations will turn out, asks Marcus Miller, professor of economics at the University of Warwick. Game theory is what its name implies. It's the use of games to study behaviour and decision-making. The most famous game of all is the Prisoner's Dilemma.

Imagine two prisoners have to choose between confessing and staying silent. If they both stay silent, they both go to jail for one year.

If one confesses and the other stays silent, the first goes free and the second gets 20 years. If both confess, they both get five years. Neither can communicate with the other. So, rationally, what should each do?

Sadly for the prisoners - but not the jailer - the answer is for both to confess. Now, take the situation facing the Greek government, which needs a deal with its eurozone partners within days to secure to avoid defaulting on its debts.

Will it have the same unfortunate outcome as the Prisoners' Dilemma? The former would lead to a payoff for Greece of 0, but would allow the EU to keep its maximum payoffs and get a payoff of 1.

The latter imposes that there would be an external shock on the market, the worst case scenario, and lead to a payoff of 0 for both Greece and the EU. The Greek debt crisis serves as a relevant application of Game Theory to potentially viewing the outcomes of economic crisis and financial reform. The players of the games are not autonomous individuals but rather larger entities with too many external and internal factors pressuring rational decision-making. There also lies uncertainty of the payoffs associated with each strategy due to the wide assortment of reactions the global economies and the European markets have from whatever strategy is chosen in the end.

Greece only has a dominant strategy of having its three-point plan accepted by the Eurozone in this theoretical case. This entire system is extremely related to our class as real world example of game theory thought and practice in a larger economic sense. It combines the concepts of player decision making, payoffs, and dominant strategies in an example based on relevant and current topics.

September 17, category: Uncategorized.