Game Theory: How to Predict the Future of the American Budget

Politicians are locked in an epic battle of economic ideas.  If they can’t come to a consensus on the fiscal budget, the government faces a shutdown of indeterminate length.

These budget negotiations are not a game. Or are they? Regardless, game theorists will attempt to analyze them.

On NPR‘s All Things Considered, Ari Shapiro took a look at the recent budget negotiations from a game theoretical perspective.  How well did he do?  Let’s take a look.

There are a lot of problems with applying game theory to a situation like the budget negotiations.  The first, and most obvious, is that game theory is predominantly a theoretical area of study.  Game theorists make a lot of assumptions and simplifications.  These shortcuts make most games more interesting to consider as thought experiments rather than actual, predictive models.

One such assumption is that all players are rational.  As we’ve discussed on Game Theory Ninja previously, this assumption needs some serious work. Shapiro doesn’t talk about this, and instead kicks the story off with a statement about politicians: “To a game theorist, each one of these people is a rational, logical, actor.”  To a game theorist, yes.  But you’d be hard-pressed to find someone on the street who agrees with this.

Games, in game theory, are generally played within a set of defined rules.  These rules help determine player strategy. Shapiro says some of the rules of the budget game might include:

  1. Do what’s right for the country.
  2. Get reelected.
  3. Serve your constituents.

However, in the budget game, rules might be different for every player, and the players might not even be sure about what their own rules are.

Another determinant of player strategy is payoff – what’s the expected reward for given actions?  In this situation, a politician might expect to get reelected if he does a good job.  However, we don’t really know what the motivations of politicians are – are they working towards reelection, or a different reward?

Games fall into a variety of categories.  Many games that we’re familiar with, like TicTacToe, have a clear winner and a clear loser.  Games like this are called “Zero Sum.”  Other games, like Prisoner’s Dilemma, require the players to cooperate.  The budget negotiations require cooperation, but, even in the event of cooperation, the payoffs to the players are unclear.

Nevertheless, Shapiro says that a complicated game like this follows “a logical, analyzable path.”  What is it?  Shapiro never lets us in on this secret.

Part of the problem with applying game theory to complex, real-life situations like this is that game theory, because of it’s severe lack of predictive power, doesn’t let us see more than a day or two down the line.

So, is game theory useful when applied to a situation like this?  Like most applications of game theory, it’s interesting as a thought experiment.  However, the predictive power of such an application is clearly lacking.

Listen to the full report here.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s