Monday, February 2, 2009

Game Show for the Ages

By FT Reporters, Chris Giles, Gillian Tett and Peter Thal Larsen
Published: February 2 2009 02:00
Financial Times (Reporting from Davos)

One central banker set out the need for greater confidence in an off-the-record session using the tools of modern game theory to come to a similar conclusion as John Maynard Keynes' paradox of thrift, in which private caution and virtue become a public vice. There were many stable states of the world, he said. A good one was where businesses invested, banks lent and those decisions were profitable because everyone was doing it at the same time.

But another is where banks refuse to lend for fear borrowers will default, companies refrain from investment for fear customers will be too hard to find, and economies shrink. In this world, companies fail and banks are vindicated in their cautious attitude to lending because their potential borrowers have gone bust.

(I have commented along the same lines ... search this blog for CRAZYTOWN. In regards to the game theory referenced by the anonymous central banker here is a previous blog entry:

Sunday, November 30, 2008
End of daze

'We did it to the world' Mom said.

I was a bit taken back. Dad had said much the same a couple of weeks ago.
Although such commentary is the lingua franca of the blogosphere, Mom and Dad probably have never read a blog. They are very conservative, middle class and have been ,ever since I was indoctrinated by the educational system, usually on the other side of the aisle vis-a-vis laying blame at America's feet.
To hear them speak like the radicalized of the late 19th century was surprising and illuminating.

Socioeconomics or socio-economics is the study of the relationship between economic activity and social life. Are we headed into a depression because we think we are or do we think we are heading into a depression because we are? Socioeconomics says the former is culpable.

Reflecting on the ideological swath of America that shares my parent's views how might the socioeconomic pendulum swing back to marching prosperity?

What pray tell offers redemption for our sins?

The answer I believe, is penance, or that is perceived penance.

At the end of daze, once we collectively feel we have served our penance, the mood will shift.

Game theorists have modeled behavior under negative externalities where choosing the same action creates a cost rather than a benefit. The generic term for this class of game is anti-coordination game. The best-known example of a 2-player anti-coordination game is the game of Chicken.

This game of Chicken is with ourselves.

Or as Citizen Harrison says ' to get through this we have to go through this.'


Gary said...

Please tell me that central bankers do not design policies based upon the results of a game!

Anonymous Monetarist said...

Game theory is part of the central banksters' policy deliberation... most certainly. Currently the gambit afoot is to forestall deflationary expectations with Goldilocks' inflation.

Here is a bit from wiki:

Economists have long used game theory to analyze a wide array of economic phenomena, including auctions, bargaining, duopolies, fair division, oligopolies, social network formation, and voting systems. This research usually focuses on particular sets of strategies known as equilibria in games. These "solution concepts" are usually based on what is required by norms of rationality. In non-cooperative games, the most famous of these is the Nash equilibrium. A set of strategies is a Nash equilibrium if each represents a best response to the other strategies. So, if all the players are playing the strategies in a Nash equilibrium, they have no unilateral incentive to deviate, since their strategy is the best they can do given what others are doing.

The payoffs of the game are generally taken to represent the utility of individual players. Often in modeling situations the payoffs represent money, which presumably corresponds to an individual's utility. This assumption, however, can be faulty.

A prototypical paper on game theory in economics begins by presenting a game that is an abstraction of some particular economic situation. One or more solution concepts are chosen, and the author demonstrates which strategy sets in the presented game are equilibria of the appropriate type.