Greece’s finance minister, Yanis Varoufakis, is developing a bit of a cult following. Somewhere between his academic background, his history as a video game economist, and his trademark leather jackets, an economic rockstar is being forged.
That increased interest is prompting a lot of people to ask whether his academic background in game theory (an economic discipline which tries to model rational decisions in various scenarios and contests) is giving him a helping hand in his fraught negotiations with Europe. Those aren’t going so well at the moment and some people are wondering if it’s all part of some big strategy.
Yanis Varoufakis is not happy with people suggesting he’s using a game theory approach. He wrote in the New York Times on Monday that “nothing could be further from the truth”.
And he built on this while answering a Bloomberg reporter’s question at a press conference:
Game theory is based on a very unrealistic assumption that the motives of players are all fixed and they are all selfish. I don’t believe that anyone’s motives in the eurogroup are fixed, and I don’t believe anybody is selfish. I think we are perfectly capable of rising above our perspective and embracing the perspective of Europe.
I’ve never been taught game theory, so I have only the same rough understanding of it that a lot of people do. With that in mind, I turned to Yanis Varoufakis’ own book on the subject (where better to start!) for some guidance.
One subject stood out as interesting given the current circumstances. That’s the idea of an “incredible threat.”
Varoufakis and his co-author describe an incredible threat as “threat or promise which, if carried out, costs more to the agent who issued it than if it is not carried out”. In the example two rational people are told there are two separate awards of £1,000 and £6,000 on offer, but if both try to claim the same amount, nobody will get anything.
This is the format used in the final round of the UK gameshow Golden Balls. If you haven’t watched it, there’s a a brutal YouTube clip here. Basically, the contestants must choose between two Golden Balls labelled “split” or “steal.” If they choose different balls, one goes home with nothing. if they both choose “steal,” they both get nothing. if they both choose “split,” they split the prize money.
Logically, they should both choose “split” — it is the only outcome that guarantees both get a payout. But neither contestant can trust the other not to be selfish, so the temptation is to deny your opponent anything by drawing the “steal” ball which will either net you everything or both of you nothing. The split ball is the “incredible threat” — it hurts you as much as it helps you.
To stretch Varoufakis’ text here, whatever they say to each other (if they’re purely after money) is irrelevant. One might say they will definitely take the £6,000, but they know that if they do, they may well lose all the money. In these circumstances, an insistence on taking the £6,000 has the significant potential to leave the threat-issuer with nothing, so it’s an incredible threat — and crucially, it can’t be believed.
And in fact, Varoufakis has used exactly this premise to describe the eurozone’s position over Greece’s bailout. Back in 2011, this is what he said (emphasis ours):
It all started with a false promise: The Greek ‘bailout’ (i.e. a combination of a gargantuan, expensive loan and severe austerity) would contain the Greek debt mountain and would, in association with the establishment of the EFSF (the European Financial Stability Facility) a few days later, ring-fence Greece thus preventing the crisis from spreading to Ireland and the Iberian peninsula.
When this false promise was shattered by the reality of a deepening Greek recession (and an impressive contagion spree across the European continent), the same falsity metamorphosised into an incredible threat: Greece would be allowed to hang if it did not do as it was told. No fifth instalment of the bailout money and no new funding for 2012 and beyond.
The problem with incredible threats, just like false promises, is that it is as if they have never been issued. And what makes a threat credible? The simple answer is: a discernible reason of why the threat’s issuer will, if some pre-specified condition is not met, be worse off ex post if she does not carry out the issued threat.”
Varoufakis goes on to make the point that he’s made much more recently — that a Greek exit from the euro would spark the end of the euro itself — in dramatic terms:
The Greek crisis cannot be quarantined. This is the beauty and the horror of a common currency: Without the shock absorbers of some modicum of common debt and surplus recycling, the tragedies of the weak become the calamities of the powerful. Just like the recession in tiny Nevada could not be kept separate from that of the richer and larger states, and would have brought the USA down with it if an attempt was made to subject it to a Greek bailout-like ordeal, so Greece’s debt crisis cannot be decoupled from the unfolding eurozone crisis (which it ignited in the first place). A Greek default will start a mighty bushfire that will rage through the eurozone’s heartland
You can decide for yourself whether that’s quite in keeping with his view that none of the European states are selfish. Later in 2011 Varoufakis also said that the “immense pain of the poorer Greeks is the fuel that keeps Mrs. Merkel’s procrastination machine running“.
Varoufakis believed four years ago that the position of the Troika-backing European states was an incredible threat, because if Greece left the euro it would be the first step in the whole currency union’s collapse. He says he still believes that, and also insists that he’s not bluffing.
If that’s true, it seems like Varoufakis is still approaching the eurogroup negotiations in the same way now as he thought about them in 2011.
Perhaps Varoufakis’ own insistence on not extending the current programme is an incredible threat of his own: The immediate consequences of Grexit certainly seem a lot worse than accepting six further months of Greece’s austerity-demanding bailout deal.
For what it’s worth, I don’t think that Varoufakis is spending his time doing step-by-step analyses of the negotiations in terms of game theory. But it’s quite clear that he has used such a rough mental framework in the past, and seems more than possible that he’s still doing the same now.