Greek retreat from game theory

17 februari, 2015 kl. 17:03 | Publicerat i Economics, Politics & Society | 4 kommentarer

ATHENS — I am writing this piece on the margins of a crucial negotiation with my country’s creditors — a negotiation the result of which may mark a generation, and even prove a turning point for Europe’s unfolding experiment with monetary union.

Game-Theory-Paper-Matrix-Final1Game theorists analyze negotiations as if they were split-a-pie games involving selfish players. Because I spent many years during my previous life as an academic researching game theory, some commentators rushed to presume that as Greece’s new finance minister I was busily devising bluffs, stratagems and outside options, struggling to improve upon a weak hand.

Nothing could be further from the truth.

If anything, my game-theory background convinced me that it would be pure folly to think of the current deliberations between Greece and our partners as a bargaining game to be won or lost via bluffs and tactical subterfuge.

The trouble with game theory, as I used to tell my students, is that it takes for granted the players’ motives. In poker or blackjack this assumption is unproblematic. But in the current deliberations between our European partners and Greece’s new government, the whole point is to forge new motives. To fashion a fresh mind-set that transcends national divides, dissolves the creditor-debtor distinction in favor of a pan-European perspective, and places the common European good above petty politics, dogma that proves toxic if universalized, and an us-versus-them mind-set.

As finance minister of a small, fiscally stressed nation lacking its own central bank and seen by many of our partners as a problem debtor, I am convinced that we have one option only: to shun any temptation to treat this pivotal moment as an experiment in strategizing and, instead, to present honestly the facts concerning Greece’s social economy, table our proposals for regrowing Greece, explain why these are in Europe’s interest, and reveal the red lines beyond which logic and duty prevent us from going.

The great difference between this government and previous Greek governments is twofold: We are determined to clash with mighty vested interests in order to reboot Greece and gain our partners’ trust. We are also determined not to be treated as a debt colony that should suffer what it must. The principle of the greatest austerity for the most depressed economy would be quaint if it did not cause so much unnecessary suffering.

I am often asked: What if the only way you can secure funding is to cross your red lines and accept measures that you consider to be part of the problem, rather than of its solution? Faithful to the principle that I have no right to bluff, my answer is: The lines that we have presented as red will not be crossed. Otherwise, they would not be truly red, but merely a bluff.

But what if this brings your people much pain? I am asked. Surely you must be bluffing.

The problem with this line of argument is that it presumes, along with game theory, that we live in a tyranny of consequences. That there are no circumstances when we must do what is right not as a strategy but simply because it is … right.

Against such cynicism the new Greek government will innovate. We shall desist, whatever the consequences, from deals that are wrong for Greece and wrong for Europe. The “extend and pretend” game that began after Greece’s public debt became unserviceable in 2010 will end. No more loans — not until we have a credible plan for growing the economy in order to repay those loans, help the middle class get back on its feet and address the hideous humanitarian crisis. No more “reform” programs that target poor pensioners and family-owned pharmacies while leaving large-scale corruption untouched.

Our government is not asking our partners for a way out of repaying our debts. We are asking for a few months of financial stability that will allow us to embark upon the task of reforms that the broad Greek population can own and support, so we can bring back growth and end our inability to pay our dues.

One may think that this retreat from game theory is motivated by some radical-left agenda. Not so. The major influence here is Immanuel Kant, the German philosopher who taught us that the rational and the free escape the empire of expediency by doing what is right.

How do we know that our modest policy agenda, which constitutes our red line, is right in Kant’s terms? We know by looking into the eyes of the hungry in the streets of our cities or contemplating our stressed middle class, or considering the interests of hard-working people in every European village and city within our monetary union. After all, Europe will only regain its soul when it regains the people’s trust by putting their interests center-stage.

Yanis Varoufakis

Varoufakis’ retreat from game theory is a perfect illustration of the limitations of überrationalistic modeling and what happens when confronting deductive-axiomatic economic models with reality.

Back in 1991, when yours truly earned his first Ph.D. with a dissertation on decision making and rationality in social choice theory and game theory, I concluded that ”repeatedly it seems as though mathematical tractability and elegance — rather than realism and relevance — have been the most applied guidelines for the behavioural assumptions being made. On a political and social level it is doubtful if the methodological individualism, ahistoricity and formalism they are advocating are especially valid.”

This, of course, was like swearing in church. My mainstream neoclassical colleagues were — to say the least — not exactly überjoyed.

For those of you who are not familiar with game theory, but eager to learn something relevant about it, I have three suggestions:

Start with the best introduction there is


and then go on to read more on the objections that can be raised against game theory and its underlying assumptions on e.g. rationality, ”backward induction” and ”common knowledge” in


and then finish off with listening to what one of the world’s most renowned game theorists — Ariel Rubinstein — has to say on the — rather limited — applicability of game theory in this interview (emphasis added):

What are the applications of game theory for real life?

That’s a central question: Is game theory useful in a concrete sense or not? Game theory is an area of economics that has enjoyed fantastic public relations. [John] Von Neumann [one of the founders of game theory] was not only a genius in mathematics, he was also a genius in public relations. The choice of the name “theory of games” was brilliant as a marketing device.
rubinThe word “game” has friendly, enjoyable associations. It gives a good feeling to people. It reminds us of our childhood, of chess and checkers, of children’s games. The associations are very light, not heavy, even though you may be trying to deal with issues like nuclear deterrence. I think it’s a very tempting idea for people, that they can take something simple and apply it to situations that are very complicated, like the economic crisis or nuclear deterrence. But this is an illusion. Now my views, I have to say, are extreme compared to many of my colleagues. I believe that game theory is very interesting. I’ve spent a lot of my life thinking about it, but I don’t respect the claims that it has direct applications.

The analogy I sometimes give is from logic. Logic is a very interesting field in philosophy, or in mathematics. But I don’t think anybody has the illusion that logic helps people to be better performers in life. A good judge does not need to know logic. It may turn out to be useful – logic was useful in the development of the computer sciences, for example – but it’s not directly practical in the sense of helping you figure out how best to behave tomorrow, say in a debate with friends, or when analysing data that you get as a judge or a citizen or as a scientist.

In game theory, what we’re doing is saying, “Let’s try to abstract our thinking about strategic situations.” Game theorists are very good at abstracting some very complicated situations and putting some elements of the situations into a formal model. In general, my view about formal models is that a model is a fable. Game theory is about a collection of fables. Are fables useful or not? In some sense, you can say that they are useful, because good fables can give you some new insight into the world and allow you to think about a situation differently. But fables are not useful in the sense of giving you advice about what to do tomorrow, or how to reach an agreement between the West and Iran. The same is true about game theory.

In general, I would say there were too many claims made by game theoreticians about its relevance. Every book of game theory starts with “Game theory is very relevant to everything that you can imagine, and probably many things that you can’t imagine.” In my opinion that’s just a marketing device.

Why do it then?

… What I’m opposing is the approach that says, in a practical situation, “OK, there are some very clever game theoreticians in the world, let’s ask them what to do.” I have not seen, in all my life, a single example where a game theorist could give advice, based on the theory, which was more useful than that of the layman.

Looking at the flipside, was there ever a situation in which you were pleasantly surprised at what game theory was able to deliver?

None. Not only none, but my point would be that categorically game theory cannot do it.

One of the proof methods that I was especially critical of in my dissertation was the use of ”backward induction.” I have to confess I haven’t given it much thought outside the class room since then, but after having spent yesterday afternoon reading Ken Binmore’s Game Theory: A Very Short Introduction, I have to confess I’m slightly surprised that it — obviously — still holds such a strong position among game theorists. For those of you not familiar with it I recommend looking at the video below and afterwards take a minute or two and try to figure out how convinced you are about backward induction really helping us to understand what is after all the very idea of game theory — to analyze, understand, and explain strategic thinking …

4 kommentarer

  1. Most accounts of game theory confine themselves to single-level games, with fixed known rules etc. Very little of life is like this, but that does not mean that game theory is defective – only that one should be critical of attempts to apply too simplistic theories.

    It seems to me that game theorists, like economists and mathematicians, can be criticised for over-selling snake-oil, but then we all have to eat, and they can only supply what the market demands.

    Von Neumann and Morgenstern point to the need to consider alternative collaborations, which seems to me to be making the same points as Varoufakis. Maybe we should make an analogy between the distinction between Keynes’ economics and ‘Keynesian economics’ and be critical of ‘von Neumannian game theory’?

  2. I became interested in game theory in my freshman year in college, and, IMX, I have found it useful. At the same time, I have been an intellectual game player since middle school, and I recognize the practical limitations of game theory. I have been surprised that equilibria of multi-player or non-zero-sum games are often treated as though they were solutions. I agree with Varoufakis that Kant can be a better guide. If laymen have good social instincts, I suspect that it is because our biology and culture have evolved to make us socially successful.

    IMO, the main lesson of game theory is one that laymen already know: Make friends. 🙂

  3. Gametheory. Another device used for social scientist to avoid observing reality.

    As a natural scientist things like that piss me off. Imagine if I could step into my beaker and interrogate the molecules about what they are up to, and observe them each individually, imagine the advances I could make! As a natural scientis i have to use flawed statistical methods and other indirect means of observation and understanding of whats going, because I am forced to, because direct methods are impossible. It is a handicap that hampers natural science to no end. To see social scientist do shit like this is an insult!

  4. Very complicated way to reach a point where very normal merchants traded their businesses since centuries. Good for ”science” and knowledge, bad for real life.
    Really bad.

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