Yanis Varoufakis, the Greek Finance minister writes in the Feb 16 NY Times:
Game theorists analyze negotiations as if they were split-a-pie games involving selfish players. Because I spent many years during my previous life as an academic researching game theory, some commentators rushed to presume that as Greece’s new finance minister I was busily devising bluffs, stratagems and outside options, struggling to improve upon a weak hand.
Is this a case of a theorist mugged by reality or someone who misunderstands theory? The second. The first sentence quoted proves it because its false. Patently so. Yes, there are split-a-pie models of negotiation but they are not the only models. What about models where the pie changes in size with investments made by the players (i.e. double marginalization)? Wait, this is precisely the situation that Varoufakis sees himself in:
…….table our proposals for regrowing Greece, explain why these are in Europe’s interest…….
He continues:
`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.’
Bluff and subterfuge are not the only arrow in the Game Theorist’s quiver. Commitment is another. Wait! Here is Varoufakis trying to signal commitment:
Faithful to the principle that I have no right to bluff, my answer is: The lines that we have presented as red will not be crossed. Otherwise, they would not be truly red, but merely a bluff.
Talk is cheap but credible commitments are not. A `weak’ type sometimes has a strong incentive to claim they are committed to this much and no more. Thus, Varoufakis’ claim that he does not bluff rings hollow, because a liar would say as much. Perhaps Varoufakis should dust off his Schelling and bone up on his signaling as well as war of attrition games. Varoufakis may not bluff, but his negotiating partners think he does. Protestations to the contrary, appeals to justice, Kant and imperatives are simply insufficient.
He closes with this:
One may think that this retreat from game theory is motivated by some radical-left agenda. Not so. The major influence here is Immanuel Kant, the German philosopher who taught us that the rational and the free escape the empire of expediency by doing what is right.
Nobel sentiments, but Kant also reminded us that
“Out of the crooked timber of humanity, no straight thing was ever made.”
My advice to Varoufakis: more Game Theory, less metaphysics.
The Leisure of the Theory Class 
17 comments
February 17, 2015 at 4:13 pm
Criticism of Varoufakis’s NYT column | Economics and Mechanisms
[…] mind to write about this, but I did not make the time to do so yet, and now I have been scooped by Rakesh Vohra. So be it; a couple of typos aside, Vohra has said some some important things and should be read […]
February 17, 2015 at 6:43 pm
rvohra
Thanks for the plug.
rakesh
February 17, 2015 at 5:17 pm
ross
wow, biased much?
February 17, 2015 at 6:44 pm
rvohra
Biased, no.
Fair & Balanced, yes!
February 18, 2015 at 4:41 am
Nanikore
Your idol frivolity is aptly named by your blog. Try actually running a country’s economy with your silly games. Your nonsense is suitably contained in an ivory tower which can not possibly be of any use to anyone dealing with real social problems. A lot of people are depending on Varoufakis and he has a lot at stake.
Btw could you reply to Lars Syll’s post on this subject?
February 18, 2015 at 12:34 pm
rvohra
Dear Nanikore
Thank you for the link to the Syll post, I did not know it. Will formulate a response in time.
Second, you are right that it is easy for someone out of the fray to take potshots at those in the thick of things, but that does not make the criticisms any less valid. Indeed, one might argue that given the high stakes, Varoufakis should have made the effort to mount a serious argument. What might such an argument have looked like? Below, is my edit of the original Varoufakis to make it consistent with the lessons of Game Theory. It assumes that Varoufakis’ challenge is to convey a credible commitment to certain red lines.
ATHENS — I am writing this piece on the margins of a crucial negotiation with my country’s creditors — a negotiation the result of which may mark a generation, and even prove a turning point for Europe’s unfolding experiment with monetary union.
Many observers have framed these negotiations as if they were split-a-pie games involving selfish players. Because I spent many years during my previous life as an academic researching game theory, some commentators rushed to presume that as Greece’s new finance minister I was busily devising bluffs, stratagems and outside options, struggling to improve upon a weak hand.
Such a view betrays both an ignorance of game theory as well as reality.
If anything, my game-theory background convinced me that the current deliberations between Greece and our partners cannot be resolved via bluff and subterfuge. This is because the pie we are splitting is not fixed in size. The terms of any split will determine the size of that pie. This is why a central goal of our deliberations with our European partners is to fashion a fresh mind-set that transcends national divides, dissolves the creditor-debtor distinction in favor of a pan-European perspective, and places the common European good above petty politics, dogma that proves toxic if universalized, and an us-versus-them mind-set.
As finance minister of a small, fiscally stressed nation lacking its own central bank and seen by many of our partners as a problem debtor, I am convinced that we have one option only: to shun any temptation to respond to this pivotal moment with sleight of hand and, instead, to present honestly the facts concerning Greece’s social economy, table our proposals for regrowing Greece, explain why these are in Europe’s interest, and reveal the red lines beyond which logic and duty prevent us from going. All of this is consistent with another principle from Game Theory, that of credible commitments.
The great difference between this government and previous Greek governments is twofold: We are determined to clash with mighty vested interests in order to reboot Greece and gain our partners’ trust. We are also determined not to be treated as a debt colony that should suffer what it must. The principle of the greatest austerity for the most depressed economy would be quaint if it did not cause so much unnecessary suffering.
I am often asked: What if the only way you can secure funding is to cross your red lines and accept measures that you consider to be part of the problem, rather than of its solution? I will not. But what if this brings your people much pain? I am asked. Surely you must be bluffing. I am not. How can we be sure you will not waver? Because, and this is the other lesson of Game Theory, I am not the only player in this game. The citizens of Greece, who have elected my party are the guarantor of my promises. It is upon their shoulders that the burden of any agreement will be borne. They must bear it willingly for it to be executed. Our partners at the negotiating table need to recognize, that it is not a Government they bargain with but a people. They will not participate in the “extend and pretend” game that began after Greece’s public debt became unserviceable in 2010 will end. No more loans — not until we have a credible plan for growing the economy in order to repay those loans, help the middle class get back on its feet and address the hideous humanitarian crisis. No more “reform” programs that target poor pensioners and family-owned pharmacies while leaving large-scale corruption untouched.
Our people are not asking our partners for a way out of repaying our debts. We are asking for a few months of financial stability that will allow us to embark upon the task of reforms that the broad Greek population can own and support, so we can bring back growth and end our inability to pay our dues.
February 19, 2015 at 5:12 am
Nanikore
International relations theory and political science largely abandoned game theory decades ago. It is only pursued on the margins. The reason is that there is no point in using rational deductivism in trying to figure out the motives of a Saddam Hussein, Kim Jong Un or the likes of ISIS.
The discipline is much healthier – it focusses on historical, country specific, psychological, sociological, anthropological and other such knowledge. Actually theory itself now forms a fairly small part of the discipline. And this, for dealing with the world’s problems, is a better use of time and resources.
Economists, however, with game theory and other such gadgets and devices rooted in Victorian Scientific Rationalism persist. At, I would argue, considerable cost.
To understand Greece’s problems and to deal with them, is as he says, to understand how it became a “debt colony”, and how it can be released from this predicament. If theory is useful here, neo-Marxian dependency theory would have the most explantory power. A Greek exit from the Euro is also not necessarily the answer.
February 18, 2015 at 6:01 am
Varoufakis et la théorie des jeux | Rationalité Limitée
[…] de quoi interpeler. L’analyse de Varoufakis est toutefois très discutable, comme le relève ce billet sur le blog « The Leisure of the Theory Class ». Un passage de l’article de Varoufakis n’est toutefois pas évoqué par le-dit billet […]
February 18, 2015 at 6:57 am
Anonymous
“the crooked timber of humanity” is actually quite an obvious standard quote… Anything new down there?
February 18, 2015 at 8:20 am
Anonymous
More from Kant: http://ftalphaville.ft.com/2015/02/16/2119260/debt-kant-and-cant/
February 18, 2015 at 10:12 am
Anonymous
Game theory applies nicely to games with rules and strict limits on behavior, not so well to human affairs.
February 18, 2015 at 2:56 pm
rvohra
Dear Anon
A common criticism, but one I’ve never understood. Any analysis of human affairs requires specifying the rules, the actions, who the players are and so on. And, yes the specification is open to debate. Game theory forces one to articulate these assumptions and subject them scrutiny. Everyone makes assumptions, but theorists tell you what theirs are.
rakesh
February 18, 2015 at 11:18 am
Willie Wong
Given the rest of the post, I found it surprising that you are proposing 10 million kronors for the individual … or mayhaps it was a typo?
February 18, 2015 at 2:15 pm
Luca
Someone else (not to far away from you) has pointed out another reason why Varoufakis’ understanding of game theory may be suspect: nadaesgratis.es/fernandez-villaverde/oliver-hart-y-sergiu-hart-son-personas-distintas-excepto-en-grecia
Maybe you Penn people are all biased?
February 18, 2015 at 2:49 pm
rvohra
Dear Luca
Great minds think alike.
Fools seldom differ.
Take your pick!
February 19, 2015 at 4:48 am
Greece and educating economists | Homines Economici
[…] A lot of macro of course, but quite a bit of finance, and also at least some game theory. (Although those who know their game theory should realise that at the moment the last thing on the mind of Yanis […]
February 20, 2015 at 11:42 am
David
When entering into a negotiation, regardless of whether I intend to bluff, it seems that a good first step would be to convince the other side of the table that I never bluff.