A friend on twitter sent me a message about a New York Times Op-Ed piece by a game theorist that ostensibly suggests real-world limitations of game theory. Yanis Varoufakis, economist, game theorist, and current Finance Minister of Greece opined that the delicate negotiations with Greece’s debt issues is a serious issue and the game theory world devoted to Poker and Black Jack is incapable of capturing the tense negotiations. Fundamentally, Varoufakis argues that Greece is not playing games at the negotiation table and they are not using some sort of psychological tricks or strategic moves to secure a better bargain than they ought to achieve normally. Directly, he says, “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.”
What is astonishing about this article is that its very existence is a counter-argument to the piece itself. Publishing this article in the Op-Ed of one of the largest globally circulated newspapers is a strategic move designed to achieve a goal. The Op-Ed is not there to offer an academic study that shows the limitations of game theory, but instead is an attempt to underscore the non-gamemanship of Greece at the negotiating table. Of note, Varoufakis offers that, “The trouble with game theory, as I used to tell my students, is that it takes for granted the players’ motives.” Which, as we know, there are several experiments that seem to suggest game theory is wrong; instead of choosing the optimal strategy or coming to the Nash Equilibrium, players seem to choose off-equilibrium strategy. The Dictator Game (which is not really a game, but still useful) and the Ultimatum Game are both cases in which we find players choosing off-equilibrium strategy. Part of the goal in present game theory research is to adjust the utility function to incorporate non-economic payoffs to games such as social inducements to coerce or deter behavior.
In International Relations, one of the major lessons of the bargaining model of war is that in anarchy, it is difficult to credibly signal to opposing players; this difficult leads to an information asymmetry between partners that make war possible when it should not be for rational actors that have full information. A few of the major ticket items that players have asymmetric information over include items such as each actor’s capability (you know your own, but may not fully know your opponents), their intent (what they really want out of negotiation), and their resolve (how willing are they to fight for it?). In these cases, it becomes possible for actors to misrepresent information about capability, intent, and resolve and, as such, part of the game of bargaining is distinguishing between credible and incredible signals. For example, sinking costs tend not to be a credible signaling strategy, but tying hands are.
Given this, actors are fearful that attempts to reveal information are not true signals, but are instead, bluffs or attempts to feign weakness (which can be strategically appropriate). Varoufakis’ article appears to be a response to this specific issue: Other negotiators believe that Greece is overplaying a weak hand and is bluffing. In response to this, Varoufakis is making a public appeal to try to undermine bluffing as a real option for the Greeks. He argues that game theory does not work here and bluffing is not something they can or will do. Consequently, this article is one of the most game theoretic actions an actor can take as they are trying to reveal their true preferences (or are they?) and reinforce those preferences as genuine. Whether this article actually accomplishes that goal is another story; for here, we can conclude, game theory is very much alive in Europe.