Game theory is a topic that is usually taught in economic education, but sadly many people without economic degrees are not exposed to it. Game theory is the studying of the interaction between individuals in different situations, commonly known as games.
Many of these games have been named and studied, and can be really interesting because depending on the model individuals one would not always choose what is best for them or everyone in the game.
One of the most common examples of game theory, the Prisoner’s dilemma, can be explained in simple terms what is happening with the Cataluña and Spanish conflict.
The most famous game is the prisoner’s dilemma. Imagine that two individuals rob a bank; they steal the money, but they are caught by the police in a long pursuit. When the police get to them they are not able to achieve any evidence to incriminate these two individuals.
Both individuals are taken into custody and separated in different rooms for interrogation. During the interrogation the police explains to each individual that if they collaborate to incriminate the other member he will get less jail time, but the other will get full time. Such that the chart representing the potential number of years in jail will look like this, where the numbers on the chart represent years in jail:
Case 1: They both stay silent, and they are both liberated without jail time since there is no evidence. In this case both will achieve minimum sentence. (0,0)
Case 2: Player A betrays, but B stays silent. In this case player A gets only 3 years of jail, but his friend, player B will do full jail time 10 years. The years in jail will look like this: (3,10)
Case 3: The opposite from case 2, Player B betrays, but A stays silent. In this case player B gets only 3 years of jail, but player A gets full time 10 years. The years in jail will look like this: (10,3)
Case 4: They both betray and give the evidence about each other. In this case they will both have 5 years of jail time. The years in jail will look like this: (5,5)
It is logical at our first look at the game to think that they will both choose not to betray since in that case, they both will get out of jail time, but this is not the case. While these two players are playing this game they are not able to communicate, however, they need to make the decision at the same time.
It is also assumed that both players are logical. What the players do have is the results of each decision. In this case the player will look at option “Stay silent” and analyse what the worst outcome would be should he choose this option. Then, he would look at option “Betray” and analyse what is the worst outcome for him would be should he go for that case.
After doing that, the player will discover that if he chooses to ‘stay silent’, the worst outcome for him could be 10 years of jail, but if he chooses to betray his team player, the worst outcome would be to spend five years in jail. Therefore, both rational players will choose to betray and the Nash equilibrium will be to (Betray, Betray).
Nash equilibrium is the result achieved by both players pursuing their optimal strategy. Nash equilibrium is not always the most efficient option, like it was shown in this example.
This is exactly what’s happening with Spain and Cataluña. They are both in a conflict that could be resolved in a better way if they were to agree with each other. This conflict is affecting the Spanish and the Catalan economy. They are the only ones that can help the situation, no other party; only the players of this particular game.
If the Spanish and Catalan government were to make an agreement, both parties would be better off in terms of economy and unemployment. This would represent Spain and Cataluña not going to jail like shown in the first outcome of the ‘game’. Although an interesting point about this type of game is that: if one of the players gives a signal to improve the situation, like Spain did to negotiate, and the other doesn’t accept, as happened with the Catalan government, negotiations don’t work anymore since there would be a lack of trust.
After the trust is broken for the first time, every single agreement later on becomes more difficult to arrange. This doesn’t mean that it’s not solvable, but every time there is no collaboration, the game becomes harder for both players because of the lack of trust. This is exactly what is happening in Spain and that is why there is no easy solution to the conflict, making the Spanish and even more the Catalan economy to be compromised.
Going back to the first example on the prisoners’ dilemma; put yourself in the shoes of one of the guys who was arrested. If your friend betrays you, the next time that you were to be arrested, you wouldn’t have any trust in him. You would probably try to send him to jail and he would also try to do the same as he knows that he lost your trust in the first game. In every game after the first one the trust between the two members will be somewhat lost.
Disclaimer:
This article was issued by Bernardo Serrano Vazquez, investment management support officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.