Greece’s Game

http://dealbook.nytimes.com/2015/02/12/greek-debt-standoff-awaits-a-decisive-move/?_r=0

The simplified outcomes are either EU bails Greece out or Greece threatens the stability of the EU by defaulting on their debt.

Greece’s and the EU’s payoffs seem to be all or nothing. If that is the case than there seems to be a coordination problem and of course an Ultimatum game. There is clearly a power imbalance.

“It’s a madman’s game theory,” said Stavros Zenios, an economist and member of the board at the central bank of Cyprus. “Don’t press us too much or we will jump off a cliff and take everyone with us.””

As Mr. Varoufakis, a trained economist, has written, “it may be rational to act irrationally.” I interpreted Mr. Varoufakis’ statement to mean that Greece actually does have power and influence over the EU so why should Greece succumb to EU demands? (Aside from threatening the stability of the Eurozone)

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1 thought on “Greece’s Game”

  1. This entire situation with Greece and their reluctance to accept the proposed bailout is really a very interesting situation. I agree with you that Mr. Varoufakis seems to believe that he has power over the EU and this is driving his “irrational” behavior. But, I do not believe this is the case considering the EU has already taken Greece’s default on its debt into account. They have determined that their default will not destabilize the Euro, which was one of the major concerns. Additionally, they have a plan in place to contain such a default and in many ways teach Greece and other members of the EU a lesson that no one nation has power over the EU. So, you are absolutely correct that Greece believes it is playing an Ultimatum game, but the EU will have no part of it. This can be seen with Adam Lerrick statement “Game theory only works if the other side wants to keep playing with you”. This statement is true for many reasons, but the most obvious is that in order for game theory to be applicable there must be at least two players in the game. Greece is playing a very dangerous strategy which could very shortly cause them to be crying out for any kind of bailout they are able to receive. And, this is exactly what the EU believes will occur shortly after their default. Through the programs that the EU is prepared to put into place the Grecian public will be calling for the government to change and to find a bailout. Given all this information I do still agree that Greece is trying to play an Ultimatum game that is all or nothing, but has very little power to ensure that it ends in their favor. Greece seems to be leaving out a lot of information in their decision to play such a strategy, and are not taking the EU’s other options into account. I cannot wait to see what is the outcome of this entire situation, and who has the correct assumption about what the consequences are.

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