How Game Theory Explains The Debt Ceiling Deal


[credit provider=”Anthony Dawson via flickr “]

A fantastic piece in this week’s Businessweek explains how game theory predicted the debt deal. Author Brendan Greeley compares debt ceiling negotiations to those during the Cold War — in that the “failure to reach a deal threatened to bring on the economic equivalent of a nuclear winter.”He looks at John von Neumann’s Theory of Games and Economic behaviour to consider that both players (Democrats or Republicans) could have either held out and the other one caved, giving one side a victory; both could have held out, bringing about disaster; or both caved, leading to a compromise.

Washington, he says, is grounds for a non-cooperative game (because of constant election cycles), but a third, independent player (the Tea Party) forced the other two to play a cooperative game — which ultimately led to the deal.

That’s the short version; read the rest of the Businessweek analysis here >