Using Game Theory to Analyze Greece’s Economic Crisis

Although Game Theory makes assumptions that are often not possible in real-world games, concepts of Game Theory can still be very useful in analyzing actual decisions and strategic moves.  In June 2015, an article called “Can game theory explain the Greek debt crisis?” was published on BBC.com that leveraged Game Theory to explain the impacts of potential outcomes of Greece’s economic crisis on the rest of the Eurozone.  As part of his analysis, the author created the following diagram to represent the payoffs of various outcomes:

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If we examine this game, we can see that it pretty mostly fulfills the requirements of a game according to game theory.  We can think of the game having 2 players – Greece being one, and the rest of the Eurozone being another.  In this game, the payoffs range between 0 and 1.  Although we do not know whether or not the payoffs reflect everything a player cares about, the information about players, strategies, and payoffs was public; the players had a fairly good idea what the payoff for each strategy was.  If Greece proposed a plan and the rest of the Eurozone accepted it, both players would benefit. If either Greece defaulted or the rest of the Eurozone rejected Greece’s plan, only the rest of the Eurozone would benefit, but their payoff would be less than if they approved the plan.  Because Greece is always better off proposing a plan, that is their dominant strategy.  However, accepting the plan is the is not a dominant strategy because that strategy can only be played when Greece proposes a plan.  The outcome of Greece proposing a plan and the rest of the Eurozone accepting it represents a Nash equilibrium, since neither player could increase their payoff by playing any other strategy.

The analysis presented in this article turned out to be correct.  Greece ended up submitting a plan that the rest of the Eurozone approved, avoiding the uncertain outcome of Greece leaving the Eurozone, which potentially could have caused the Eurozone to collapse.  The real-world outcome matching the outcome predicted by game theory demonstrates that, at least in some cases, applying game theory can be an effective way of predicting decision-making given a finite number of strategies and payoffs for each combination of strategies.  The idea that it is possible to model human behavior and decision-making is pretty powerful, and it might help us make decisions that lead to better outcomes in the future.

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