„GREEK DILEMMA”

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The game that has been going on for months now between Greece and the EU (as well as the IMF and the ECB) is often called a game of “chicken”. This is a reference to a car challenge, wherein two drivers drive towards each other on a collision course. The one who swerves first is the chicken, and the opponent wins the game. But is it really a “chicken” situation? Where is it headed? We analysed this below using game theory methodology.

Chicken game

The game of chicken, also known as the hawk-dove or snowdrift game, is an influential model of conflict for two players in game theory. Neither player knows the decision the other will make, and they have to decide whether to cooperate or compete. Yielding (swerving out of the way) is cooperation, and competing is staying on the collision course. It is presumed that the best outcome for each driver is to stay straight while the other swerves: this way they both stay alive, and the one staying on course wins the game. The only problem is that the game can never have a positive outcome for both players. The second best outcome is when both swerve: they stay alive, and the game ends in a draw. A worse outcome for the cooperating (yielding) player is when the other keeps competing (does not swerve). This way, the yielding player stays alive but loses. The worst scenario, of course, is when both keep competing and die together in a fatal crash. So what do the experts say? Should one yield or not? There is no good solution.

The game between the EU and Greece

The wrangling between the EU and Greece is much more complex than the simple game situation described above. Let us try anyway, and let’s simplify the options to the extreme, and then see what comes out of it! In my model, the question the Greek have to face is whether they should implement really painful measures. For example, should they cut pensions or do something along those lines – the actual measure does not matter, as long as it’s painful enough. The real question is: will they cooperate? In the model, cutting back on pensions is cooperation, and refusing to do so is competing. The EU can choose between releasing some Greek debt or not. Releasing some debt means cooperation, and refusing to do so is competing. If either player cooperates, then Greece can remain in the Euro zone, and if they both compete, it can not.

The Greek perspective

This situation is a real chicken game for Greece. The worst-case scenario is being cast out of the Euro zone, if both parties decide to keep competing. Cutting back on pensions is a better outcome, even if the EU does not reduce their debt. Of course, it would be even better if some debt were released as a compensation for pension cuts, and the best outcome is a debt relief without having to cut back on pensions.

The recommended, logical strategy for a player in the chicken game is described perfectly be Hermann Kahn (as also quoted in László Mérő’s book “Mindenki másképp egyforma”, or, “all else being equal”):

“The ‘skilful’ player may get into the car quite drunk, throwing whiskey bottles out the window to make it clear to everybody just how drunk he is. He wears very dark glasses, so it is obvious that he cannot see much, if anything. As soon as the car reaches high speed, he takes the steering wheel and throws it out of the window. If his opponent is watching, he has won. If his opponent is not watching, he has a problem…”

The Greek followed exactly this strategy when Janis Varufakis (or as I call him: The Walking Debt) showed nothing but arrogance and cynicism in negotiations with the EU (which of course completely isolated him). He was trying to relay the image that Greece would not yield, not swerve off the collision course, refuse to cooperate, and therefore everyone is better off if the EU yields. Recently, the tone has been refined a little, but the same strategy can be identified in Greek statements such as “sorry, we have no money to pay the instalments due in June, we would rather pay pensions”. The message: you should swerve, as we surely won’t.

The EU perspective

But why did the EU choose not to play a similar strategy, and what made the Greek refine their tone? To answer this question, we need to look at the game from the EU perspective. It is easy to see that the most desirable outcome for the EU is to refuse debt relief, while Greece agrees to cut back on pensions. A worse scenario is when Greece agrees to cut back on pensions in exchange for some debt relief. This is exactly what the chicken game would require.

However, there are some intriguing points that follow. For the EU, the worst possible outcome is surely not ousting Greece from the Euro zone (mutual competition), as dictated by the logic of the chicken game. This would only be the case if Greece leaving the Euro zone were to revive fears of the breakdown of the monetary union. This is exactly what the Greek tried to emphasize in their communications: were they to leave the zone, the EU would also suffer as investors pull out of European instruments, wreaking havoc in stock and bond markets. This was the foundation of their strategy.

However, it seems that the market is now immune to this outcome, and there are no fears of the “infection” spreading. As fears about the Greek exit culminated, the bond returns in the EU periphery duly decreased, while European stock markets showed upward trends. Signs of panic could only be identified concerning the condition of Greek instruments. The problem of Greece separated from Europe from mutual competition would be only the second-worst outcome for the EU.

The worst outcome for the EU is to cooperate, while Greece refuses to do so, i.e. they refuse to cut back on pensions. This way, the EU would face a mass of claims from other peripheral member states. The logic behind this is simple: if the Greek were allowed to do it, everybody should be allowed. Extremist parties like Podemos in Spain would gain further momentum, since this outcome would prove that Syriza was right when choosing the collision course: painful measures can be avoided altogether, debts need not be repaid, and the EU can go and screw themselves.

However, compared to Greece, these countries are heavyweights both with respect to GDP and their debt, which means an unacceptable risk for the EU. They cannot afford to let a situation like this develop. Therefore, the worst possible outcome for the EU is not Greece leaving the Euro zone. The EU is in another well-known trap situation of game theory, called the prisoner’s dilemma.

Prisoner’s dilemma

It is important to understand the difference between the prisoner’s dilemma and the chicken game, so let’s shortly remind ourselves what it is exactly. Two criminals are arrested for a serious crime they supposedly committed together. However, there is no evidence: the only chance to imprison them is to get a confession. If neither of them makes a confession, they will both be imprisoned for 1 year on a lesser charge. If one betrays the other but the other remains silent, the traitor will be set free and the other will serve 10 years in prison (and vice versa). If they both betray each other, the 10 years will be divided between them: each will spend 5 years in prison. Each prisoner is in solitary confinement with no means of speaking to or exchanging messages with the other.

The possible outcomes of the chicken game and the prisoner’s dilemma are summarized in the table below from the perspective of Player 1. Outcome 1 is the worst, and outcome 4 is the best possible scenario. Cooperation means cooperation with the other player, not with the police. It is obvious that the worst possible outcome is when I cooperate (do not make a confession) and the other prisoner competes (makes a confession), as in this case only I’ll have to suffer the consequences (10 years in prison). In the chicken game however, the worst-case scenario is when we both compete (do not swerve from the collision course), as we’ll both end up dead.

pic_1_gorogdilemma

pic_2_gorogdilemma

Expected outcome

Thus, the game is asymmetric in the EU–Greece competition: it is a game of chicken from the Greek perspective, and a prisoner’s dilemma from the EU perspective. This is not the first example of such a situation in world history. László Mérő presents an excellent example of this in his book, mentioned above:
“The biblical King Solomon once had to make a decision in the following situation: two women claimed themselves to be the mother of the same child. One of them was the real mother, and the other was an imposter. Solomon raised his sword and told them he would fairly divide the child between them by cutting the child in half. One of them immediately renounced her claim, saying she was not the mother of the child. Solomon awarded her with the child.

If we are as wise as Solomon, we probably don’t need game theory. However, using the methods offered by game theory, even those with less wisdom can arrive at the same solution. It is obvious that the real mother has different preferences from those of the imposter: the game is asymmetric. For the real mother, the situation is a chicken game, where the other competitor is completely determined to compete even if it means defeat. The imposter has a different perspective: for her, the worst possible outcome is giving the child to the other woman; even the death of the child is a better outcome. For the imposter, this is a prisoner’s dilemma. The behaviour of the two women is precisely predicted by game theory.”

The struggle between the EU and Greece is almost precisely the same as the situation faced by the two women in Solomon’s trial. The only difference is that there is no King Solomon here: the situation developed on its own and was not artificially created. And consequently, there is no one to “administer justice”. However, the expected behaviour of the players is predicted precisely by the above example: since for the EU even mutual competition is better than choosing to cooperate while the Greek keep on competing, the EU will not risk this. The EU, playing the prisoner’s dilemma, will not cooperate by agreeing to debt relief, while the Greek, playing the chicken game, will see the asymmetry of the game and will be forced to cooperate or at least take painful measures such as cutting back on pensions. This is why the EU plays with a different strategy, and this is why the initial Greek arrogance seems to subside with time.

pic_3_gorogdilemma

This is what the theory says, anyway. However, in reality the final outcome will certainly be much less obvious, as real-life situations are constructed from a series of multi-player games with much more complex and diverse aspects, and possible outcomes are significantly more difficult to predict. Sooner or later, we will see.

Original date of Hungarian publication: 29 May 2015

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