President Obama Learns Some Game Theory

INTRODUCTION

For background, see prior post on The Limits of Negotiation.

ECONOMIC NEGOTIATIONS

Basic game theory works best in economic negotiations.  The players have the same assumptions (act rationally, make money), enter into the negotiations voluntarily and negotiate which positive payoff matrix they will agree on.  Economists usually assume that people are playing a positive sum (win – win) game.  That is, how to divide up the monetary or utility gains.

Game theory indicates there is a better chance at cooperation or reaching good faith agreements if the players know they will be playing the game repeatedly or if both players see an advantage to a long-term agreement.

Economic rationality implies that an agent will not agree to an outcome if the individual will be worse off than not negotiating. The alternatives are not to negotiate or find another party with whom to reach a positive or better agreement. A competitive economy, however imperfect, provides alternatives.

 

ECONOMIC GAMES AND INFORMATION

In simple games, the players know what the payoff matrix looks like when the two players try to decide which strategy to use and what their opponents’ strategy is.  Economists know that even a simple, deterministic outcome is unlikely.  One reason is asymmetric information.

Economic theory usually assumes that all parties (agents in econspeak) have total information.  This is especially true in finance theory.  But in the real world, this is often not true.  The agent with superior information has a negotiating advantage.  It is likely that the outcome will be different than the full information outcome.  The more informed agent will probably end up with a larger share of the profits.  The increased profits may be a function of the difference in the relative information known by the players.  But it is still a positive sum game.

POLITICAL NEGOTIATIONS

Political negotiations are different.  Other factors are important – ideology, moral beliefs, coercion, threat of violence, and a sense of fairness, in addition to not negotiating.  Zero and negative sum games are more likely, especially if an alternative strategy is violence. History is full of  such examples, where politics is seen as a kill or be killed zero-sum game. Since the end of World War Two, there have been over 150 civil wars. 

The payoff matrix of political games is often measured in power, not money. The value of the payoffs is more difficult to quantify and more uncertain.  Often, negotiations are delaying tactics and agreements are broken. 

In American politics, there are political incentives not to agree.  An example occurs when there are term limits, especially in the second term of the president.  The opposition has no incentive to agree to a reasonable policy if they believe the president’s party will benefit politically.  They have every incentive to attack the president’s policies, even if they agree with the objective.  Even members of the president’s own party may not support him as they maneuver to become future presidential candidates.

CREDIBLE THREATS

An important aspect of political conflict is the concept of "credible threats."  If a country or group wants another country or group to change its behavior or negotiate, one means is to threaten it with some action.  A threat is like a bluff. If an opponent calls a country's bluff, the country must be willing to carrying out the threat. If if doesn't, it loses credibility and is more likely to be ignored when it makes future threats. It is more likely that other countries or groups will continue or increase their behavior. Power and influence declines.
  

PRESIDENT OBAMA LEARNS GAME THEORY

President Obama became president with a belief that he could negotiate rationally, that he could use logic and persuasion to convince political opponents and special interests to compromise for the general good.  He played an economic game. His opponents here and abroad played political games. President Obama has finally realized that.

He has had to deal with an increasingly conservative Republican party, many of whose most active members personally detest him. 10% of Americans, presumably Republicans and conservatives, believe Obama is the Anti-Christ.  Internationally, he has had to deal with Islamic fundamentalist groups, Iran, Syria, Iraq, Afghanistan, North Korea, armed militias of ethnic groups, the chaos of the aftermath of the overthrow of Quadaffi in Libya, Hugo Chavez in Venezuela and Vladimir Putin in Russia.  None of these groups and their leaders fit the rationalist profile of a game theory player.

President Obama inherited a number of immediate and long-term problems. He believed that there were rational solutions to the problems, which could be reached through logical arguments based on facts and reason, leading to negotiations and mutually beneficial compromises.  His political opponents didn’t share this assumption. Again and again, President Obama appeared exasperated by the irrationality of his political opponents, both at home and abroad. He shouldn’t be surprised any more. 

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Please see related post, American Foreign Policy Since 1991.

Also, The Limits of Negotiations:  A Little Applied Game Theory