Brexit – Europe’s politicians don’t know their game

The tragedy of Brexit is that neither the United Kingdom nor, especially, the European Union saw fit to convincingly spell out to the public what the future would look like after the referendum. A credible precommitment, not excluding credible threats, ought to have promoted a cooperative outcome in the game. Instead, the uncertainty drove each of the British peoples to what they believed to be the safest option.

Brexit is sometimes argued to represent a situation where mutual cooperation is in everyone’s best interests but still the individual players “defect” and go solo. To model such situations, a game called “prisoner’s dilemma” has been conceived. In such a game, two partners-in-crime are interrogated separately. If both cooperate – with each other that is, not with the authorities – they can only be convicted on a lesser charge; if both defect, they face heavy charges; but in case one partner remains silent and the other betrays his partner, the partner ends up in jail for an even longer time whereas the other is released. Cooperation in the prisoner’s dilemma simply is not a strong equilibrium, i.e. a player can do better by unilaterally changing strategy. Defection is the dominant strategy. That is not the game you want to play.

It is implied that the prisoners have no recourse to rewarding or punishing their partner-in-crime after the game has played out. By advertising beforehand an expected penalty for players that defect against cooperators, the prisoner’s dilemma morphs into another game that has been known since Jean-Jacques Rousseau and David Hume as the stag hunt. Two hunters must decide whether to combine their skills to try and hunt down a stag or go it alone and settle for an easier hare. (For those that dislike hunting: Hume gave the example of two rowing a boat; if one does not cooperate, the other rows in vain.)

Crucially, the stag hunt game has two (pure-strategy)equilibria: the more rewarding stag hunt in the event both cooperate, and the alternative of the hare that is less risky as it does not depend on coordination. The crux is not whether to cooperate is an equilibrium but rather which equilibrium to choose: potential solidarity or perceived safety. Precommitting to a penalty mechanism – ranging from the European Union precluding any cherry-picking to full-out retaliatory measures – allows at least a cooperative equilibrium to arise by transforming the prisoner’s dilemma into a stag hunt. But uncertainty surrounding the willingness to cooperate and the payoff from doing so pushes the hunters to individually settle for the hare. Resolving such uncertainty may in addition nudge them towards the higher-potential stag. We leave it to the reader to identify which is which in brexit country.

Or maybe brexit is best captured by a game called “battle of the sexes”? Suppose, for argument’s sake, that Britain preferred to leave the Union whereas the continentals would have liked the islanders to remain, but that in any case all of Europe’s politicians wanted to be ‘in the same place’: either the United Kingdom leaves and the European Union reluctantly accomodates the departure, or the United Kingdom remains and puts on a happy face. In either coordination equilibrium only one player is pleased, but both equilibria are preferred to the situation in which a mismatch occurs. How then to avoid the parties choosing different strategies?

One possible way out is to “refine” the equilibrium concept by means of a randomising device that correlates the parties’ strategies. If both parties decide to flip a coin (say the United Kingdom organises a referendum) and agree beforehand that “heads” means “remain” and “tails” implies “leave,” neither would rationally want to alter his strategy after the referendum for fear of getting stuck in a coordination failure. Which brings us back to the tragedy we started from.

The Artist — Life or Work?

Do you need to know the details of an artist’s life, or even like the person, to be able to appreciate the work? At the beginning of Ioon, Plato has Socrates say this: 

I must say I have often envied you rhapsodes, Ion, for your art: for besides that it is fitting to your art that your person should be adorned and that you should look as handsome as possible, the necessity of being conversant with a number of good poets, and especially with Homer, the best and divinest poet of all, and of apprehending [530c] his thought and not merely learning off his words, is a matter for envy; since a man can never be a good rhapsode without understanding what the poet says. For the rhapsode ought to make himself an interpreter of the poet’s thought to his audience; and to do this properly without knowing what the poet means is impossible. So one cannot but envy all this.

[translated by W.R.M. Lamb, 1925]

Note how Plato/Socrates invert the commonly proffered argument that to understand a work of art, it may (or may not) be good to learn something about the author’s life in general, or at least the circumstances in which the particular work of art was created. The rhapsode, the expert performer of the epics of Homer, must rather understand (συνίημι, litt. bring together) what the poet means to be able to act as an interpreter (ἑρμηνεύς) of the artist’s thinking (διάνοια) for the audience. So the work of art serves to understand the artist’s inner world.

Ein klarer Duft blaute alle Schatten

Palermo, April 2 1787

Johann Wolfgang Goethe’s Italienische Reise is not a travel guide. He gives us an autobiographical account of a turning point in his life. Unhappy with his work in the Weimar administration and in his relationship with Charlotte von Stein, he steals away to the South. Following in his father’s footsteps who toured Italy in 1740, he sets out for Rome and Roman antiquity from Karlsbad on September 3 1786 at three in the morning to recharge and accumulate a lifetime of experiences to draw from. → Read More

Perverse noordzuidstromen [Addendum]

De Duitse centrale bank heeft ongeveer 500 miljard euro vorderingen uitstaan ten aanzien van de perifere eurolanden.

[Fout] → Read More

World Economic Forum Risks Landscape 2012

[World Economic Forum, Global Risks 2012]

Strategies for the social dilemma

“The core problem that cooperative strategies seek to resolve is the so-called social dilemma: a situation in which individual rational behavior produces poor group outcomes. Strategy is ultimately about behavioral dynamics, and the findings of cooperation studies to date suggest many ways in which cooperative behavior can be tuned.”

Source: Andrea Saveri, Howard Rheingold, Alex Soojung-Kim Pang, and Kathi Vian (2004), Toward a new literacy of cooperation in business. Managing dilemmas in the 21st century, Institute for the Future, 67 pp.

Most markets do not clear

“The usual simultaneous equation model imposes a comparative static frame of reference of minimal value-theoretical content and shoves the operation of financial markets into the background of the picture,” Axel Leijonhufvud wrote in On Keynesian economics and the economics of Keynes (in 1968!).

Disequilibrium economics is in fact the economics of Keynes. Even Hicks acknowledged that “what [the infamous IS/LM curves] express is something like a relation between the price-system and the system of interest rates; and you cannot get that into a curve.”

Most markets do not clear, not (necessarily) because of frictions but because of imperfect information or information asymmetry, i.e. uncertainty. Highly stylised neutrality results such as M&M or Ricardian equivalence derive from assuming away the homo in h. economicus — and what George Akerlof would call “the missing motivation”, i.e. the absence in the utility function of norms, of what people ought to do. Speculators, bankers and economists, to be sure, but politicians no less.

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