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The BBC's Inept but Revealing Attempt at a Game Theory View of Greek Crisis

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Greece Future?
(image by iStock by Getty Images)

The BBC came up with a good "hook" for a story on the troika's assault on the Greek economy and people. "Yanis Varoufakis, the Greek finance minister, spent his academic career " studying game theory." Professor Marcus Miller, a UK economist (U. Warwick) wrote an article for the BBC premised on how Varoufakis would apply game theory to Greece's negotiations with the troika (the IMF, ECB, and the European Commission). Miller is a colleague of the great Robert Skidelsky and has co-authored with him an article explaining the economic illiteracy and self-destructive nature of the troika's (and UK's) infliction of austerity in response to the Great Recession.

The BBC, however, is such a great fan of austerity that one rarely reads why the vast majority of economists think that using austerity to respond to a Great Recession is akin to the quackery of bleeding a patient to make him healthier. Miller's article in the BBC about game theory has the wrong title (recall that the author often does not get to choose the title), the wrong game, the wrong concept, and the wrong payoffs. The title of the article is: "Can game theory explain the Greek debt crisis?" The article does address that issue. It is limited to the issue of the new Greek government's negotiations with the troika concerning a crisis that they inherited.

The game that Miller uses is the "prisoner's dilemma." That is the wrong concept and the wrong game and should actually be called the "prisoners' dilemma" because it requires at least two prisoners. The "prisoners' dilemma" game is used to explain (1) why cooperative behavior -- by criminals -- would be their optimal strategy, (2) why prosecutors and the police should prevent that cooperation, and (3) how prosecutors and the police can shape the prisoners' incentives to encourage them to confess. As conventionally pictured, and Miller falls into this trap, the game does a poor job of explaining the third point. Real life prosecutors, police, and criminologists in the U.S. do a far better job of optimizing the incentives than do economists -- and did so long before game theory was developed.

Here is Miller's explanation.

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.

As anyone with even the faintest understanding of the U.S. criminal justice system knows, which includes anyone who has watched a U.S. police drama on television, Miller's description is deeply suboptimal. It misses the key element of timing. The actual dynamic, which optimize the incentive to confess, is whoever rats out his confederate first gets a far better deal. It would be nuts to give both the same sentence ("five years") if they "both confess." It is common for both defendants to confess.

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But the deeper problem is that this is not the proper game for analysis of either the Greek crisis or Varoufakis' negotiations with the troika. Greece, and the Greek people, are not criminals, no one is trying to get a confession, and the "game" everyone should be using is a "cooperative" game rather than prisoners' dilemma -- which is premised on preventing cooperation.

If anyone is using prisoners' dilemma as its game theory in the Greek context it would have to be the troika. The logic would go like this. Greece's position in favor of a "troubled debt restructuring" (TDR) and an end to austerity is in the interests of the peoples of Europe (and the world). The appropriate cooperative "game" would be to (a) strike a deal to end austerity in response to recessions throughout the EU and (b) to negotiate TDRs in Spain, Italy, and Greece. That cooperative "game," however, is being blocked by the troika and is bitterly opposed by conservative leaders in Spain, Italy, the Baltic States, and Ireland. Part of this refusal to enter into a win-win cooperative game on the part of the troika is ideological. Part of the troika's refusal is reputational. If the leaders of the troika were to end austerity and the EU's economy were to improve more rapidly it would be undeniable that their economically illiterate infliction of austerity had caused massive, gratuitous suffering.

Similarly, the opposition of conservative political leaders in various EU states to employing a cooperative "game" in Greece is that it would threaten their power and reputation. Spain's conservative party would fall from power in 24 hours if its leaders ever admitted that austerity forced Spain into Great Depression levels of unemployment and that austerity was the problem rather than the solution. The Prime Minister of Spain is eager to have Greece fail to convince the troika to adopt a cooperative "game." He would love to see the troika force the Greek government to inflict even greater austerity on the Greek people in order to discredit the Greek government and his Spanish anti-austerity opponents, the surging Podemos party.

Miller and Skidelsky know these facts and have put them in writing. If Greece were a corporate debtor, its creditors would have routinely negotiated a TDR with it seven years ago -- precisely because normal creditors understand that their interaction with a debtor who cannot repay the full debt on its original terms should take the form of a cooperative "game." Normal creditors, if the troika is not involved and thinking in extortionate terms, realize that they should cut their losses through a deal that reduces and stretches out the payments and lowers the interest rate on the debt.

This is why a firm like Elliot Management, Paul Singer's vulture hedge fund, which tries to profit from, and therefore discourage, TDRs -- see its attempt to extort Argentina -- is so odious and bad for the world. Richard Zabel, the number two (non) prosecutor of the elite banksters that led the three great epidemics of accounting control fraud that drove the crisis in the U.S. Attorney's office for Manhattan, just announced that he will soon take a job with Singer. In a grotesque act, while still a purported prosecutor, he issued an ode to Singer's vulture ethics that was quoted by the New York Times. Zabel's ode is a further proof of our family rule that it is impossible to compete with unintentional self-parody.

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"Elliott has a long record of success and relies on the rule of law as a pillar of its investment philosophy," Mr. Zabel, who will leave his prosecutorial job at the end of June, said in an interview.

Hedge fund owners are the wealthiest people on Wall Street, so this is the new nature of the revolving door that helps produce immunity for elite banksters and the ethics-free world of the hedge funds. The NYT article explained the (non) prosecutors' quest for "Wall Street riches."

[Zabel's] move also reflects a broader shift on Wall Street, where hedge funds and private equity firms, rather than law firms, are increasingly recruiting federal prosecutors, enticing them with the promise of Wall Street riches. Steven A. Cohen's Point72 Asset Management -- the successor to his SAC Capital Advisors, which pleaded guilty to insider trading charges in an investigation overseen by Mr. Zabel -- recently hired a former United States attorney for Connecticut.

Zabel was an important contributor to eliminating the "rule of law" for elite banksters and will enjoy "Wall Street riches" precisely because Singer views him as helping to fend off any (unlikely) effort by the government to rein his depredations. In game theoretic terms, Singer's strategy is designed in a manner that discourages cooperative "games" that make the world better off.

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William K Black , J.D., Ph.D. is Associate Professor of Law and Economics at the University of Missouri-Kansas City. Bill Black has testified before the Senate Agricultural Committee on the regulation of financial derivatives and House (more...)

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