When the Finance minister is a game theorist

Events after the election in Greece, related as they are to game theory, have prompted me to revive this moribund blog. I promise I will be updating it more frequently from now on. So here is my first take on this blog of the negotiations that Greece and the Euro zone authorities are engaged in now.

Ever since the election of January 26, 2015 in Greece, an elaborate confrontation has been evolving between the new Greek government and the European Central Bank (ECB) and the International Monetary Fund. Justin Fox, writing in Bloomberg View, said that the new Greek Finance Minister, Yanis Varoufakis (here is his blog), is perhaps playing a Colonel Blotto game with the European governments, spreading the fight in many fronts. Then again, it could just be a classic Prisoner’s Dilemma, as Fox also says.

Today, the ECB released a statement that appears intended to intimidate the Greek side. But Karl Whelan is not too impressed. He points out that the ECB has not been following any clear rules in deciding what to accept as collateral for lending to banks in the Euro zone. Whelan takes this as a nudge towards more productive negotiations to start before February is out. In Whelan’s words:

The ECB is flexing its muscles, letting everyone know that are very close to pulling liquidity from Greece.

I want to point out that applying game theory in a negotiation is a tricky business. You have to assume that the sides to the negotiation have a shared mental model (which is the same as that of the analyst, you) of what the game they are playing is. So you can analyze the situation, make a prediction, have the prediction subsequently falsified by events, and yet blame the predictive failure on the many degrees of freedom in setting up the game for your analysis.

I will be sure to follow developments in this arena closely. There ought to be common ground that the sides of the negotiation can find. Whether the tactics Varoufakis and his colleagues have adopted will find the common ground and lead to a good outcome for all sides remains to be seen. I am not going on a limb to make predictions.

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