Thursday, July 14, 2011

Correspondence

Liberty At Stake writes:
What is FLG's considered opinion on calling the President's bluff?

FLG assumes this is in reference to the debt ceiling.

Well, this is the classic game of Chicken. From that very Wikipedia article, we have this game theory analysis:
Because the loss of swerving is so trivial compared to the crash that occurs if nobody swerves, the reasonable strategy would seem to be to swerve before a crash is likely. Yet, knowing this, if one believes one's opponent to be reasonable, one may well decide not to swerve at all, in the belief that he will be reasonable and decide to swerve, leaving the other player the winner. This unstable situation can be formalized by saying there is more than one Nash equilibrium, which is a pair of strategies for which neither player gains by changing his own strategy while the other stays the same.

So, it makes strategic sense in this case to signal that you are crazy. If your opponent thinks you are crazy, then they think you won't swerve and instead they swerve.

That's all well and good, but assumes perfect knowledge of the payoffs for all parties. What worries FLG is that the players in this budget stand-off don't really have the payoff information. Oh, they have the political payoff information insofar as they understand it, but the financial and economic payoff information and the political fallout from that? FLG is far less sanguine. This post by Megan McArdle spells it out nicely:
There are people in Washington who get Wall Street, and people on Wall Street who get Washington. But they are a small minority in both places--and in both places, outcomes depend on the majority. I submit that this disconnect is dangerous. Wall Street is giving us too much rope to hang ourselves because they don't really understand the barriers to achieving fiscal sanity--and Washington is taking it, because they don't really understand how Wall Street thinks, and what the bond traders will do when they finally decide that we're likely to default.

1 comment:

Anonymous said...

Sorry. That answer makes less sense than Obama's stance.

Mrs. P

 
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