Just a few weeks back, the media was full of news of energetic Sarkovsky and enigmatic Merkel meeting together couple of times in a month and admonishing Greece. But now, both are at logger heads.
Whilst Germany (Merkel) supports Austerity Measures as the way out of crisis of Italy, Greece and other Eurozone countries, including France, who is most affected by Italy and Greece. France disagrees. They believe ECB must support these countries with European version of Quantitative Easing.
The result is there is stalemate, resulting in strong rumours and speculation that the time of Euro is over -it is just a matter of time the modern "Continental System" of Euro collapses.
Let us see whether Game theory (a mathematical method for analyzing a person’s success based upon the choices of others) can help to find some solutions. It is reputed that Gordon Brown of UK used Game Theory to solve some of the problems, when he was heading the Finance of UK, during the premier ship of Tony Blair.
For those, who are not familiar with the theory of Game theory, let us explain with an example. One of the canonical examples of Game theory is called “ The prisoner’s dilemma”. This shows why two individuals might not follow the most logical action, even if it appears that it is in their best interest to do so. The example of the prisoner's dilemma is given below:
Problem: Two stupid men are arrested for some crime that will put them in jail for 1 year as maximum prison term. But the police do not possess enough evidence to convict them. After separating two men, the police offer both a similar deal- if one testifies against his partner (assists police), and the other remains silent, the testifier goes free and the other receives the full one-year sentence. If both remain silent, both are sentenced to only one month in jail for a minor charge. If each acts stupid, each receives a full 1 year sentence. Each prisoner has following choices (i) either to assist police or (ii) remain silent. What should they do?
The beauty of Game Theory problems are that it is not mathematical. There is no mathematical accuracy in the answer. This is the sort of decisions finance managers and economists face.
Coming back to the problem, each player is concerned with lessening his time in jail. There is a chance that they would want the other to get maximum prison term, both will testify against one another and the result is maximum sentence for both. If they help each other, taking others interest also into account, they will get only one month each, as police don’t have the evidence. In the game, if the sole worry of the prisoners seems to be increasing his own reward (i.e. selfish/egoistic), then they would get one year each. The interesting aspect of this problem is that the logical decision leads both to betray the other resulting in maximum prison terms. While illogical decision not to pursue own interest (of going free) would result in maximum common benefit (both gets just one month prison term) and hence the best choice for both
Applying the above situation to the Eurozone, France and Germany has following options:
Option 1 – Both Germany and France agree to implement some austerity and ECB involvement.
Option 2 – France is forced to go in with German policy
Option 3 – Germany is forced to toe French policy
Option 4 – No agreement between France and Germany. At the time of writing of this article, (21 Nov 2011), both has adopted Option 4.
Using the basics of game theory, the pain of both France and Germany and Eurozone at large will be solved by following the Option 1. All other options involve maximum prison sentences! i.e. Eurozone recession, unemployment, losses for companies and hence to banks, lack of business confidence, lower tax revenues, etc. would be some of the symptoms of this punishment.
Whilst Germany (Merkel) supports Austerity Measures as the way out of crisis of Italy, Greece and other Eurozone countries, including France, who is most affected by Italy and Greece. France disagrees. They believe ECB must support these countries with European version of Quantitative Easing.
The result is there is stalemate, resulting in strong rumours and speculation that the time of Euro is over -it is just a matter of time the modern "Continental System" of Euro collapses.
Let us see whether Game theory (a mathematical method for analyzing a person’s success based upon the choices of others) can help to find some solutions. It is reputed that Gordon Brown of UK used Game Theory to solve some of the problems, when he was heading the Finance of UK, during the premier ship of Tony Blair.
For those, who are not familiar with the theory of Game theory, let us explain with an example. One of the canonical examples of Game theory is called “ The prisoner’s dilemma”. This shows why two individuals might not follow the most logical action, even if it appears that it is in their best interest to do so. The example of the prisoner's dilemma is given below:
Problem: Two stupid men are arrested for some crime that will put them in jail for 1 year as maximum prison term. But the police do not possess enough evidence to convict them. After separating two men, the police offer both a similar deal- if one testifies against his partner (assists police), and the other remains silent, the testifier goes free and the other receives the full one-year sentence. If both remain silent, both are sentenced to only one month in jail for a minor charge. If each acts stupid, each receives a full 1 year sentence. Each prisoner has following choices (i) either to assist police or (ii) remain silent. What should they do?
The beauty of Game Theory problems are that it is not mathematical. There is no mathematical accuracy in the answer. This is the sort of decisions finance managers and economists face.
Coming back to the problem, each player is concerned with lessening his time in jail. There is a chance that they would want the other to get maximum prison term, both will testify against one another and the result is maximum sentence for both. If they help each other, taking others interest also into account, they will get only one month each, as police don’t have the evidence. In the game, if the sole worry of the prisoners seems to be increasing his own reward (i.e. selfish/egoistic), then they would get one year each. The interesting aspect of this problem is that the logical decision leads both to betray the other resulting in maximum prison terms. While illogical decision not to pursue own interest (of going free) would result in maximum common benefit (both gets just one month prison term) and hence the best choice for both
Applying the above situation to the Eurozone, France and Germany has following options:
Option 2 – France is forced to go in with German policy
Option 3 – Germany is forced to toe French policy
Option 4 – No agreement between France and Germany. At the time of writing of this article, (21 Nov 2011), both has adopted Option 4.
Using the basics of game theory, the pain of both France and Germany and Eurozone at large will be solved by following the Option 1. All other options involve maximum prison sentences! i.e. Eurozone recession, unemployment, losses for companies and hence to banks, lack of business confidence, lower tax revenues, etc. would be some of the symptoms of this punishment.
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