The Largest Experiment in Applied Game Theory Ever

I am very interested in the LHC at CERN. Not only in the fundamentals of physics unveiled by the experiment, but in the amazing efforts in logistics, project management and engineering that make the world’s largest machine (Borrowed from Sean Caroll and Lisa Randall) work. Probably I have studied physics to contribute to such experiments someday.

But we have something even more awe-inspiring today. As an technical aside, we are (I am) not the logistics managers in the experiment, but we are: the particles, the guinea pigs, the subjects, the probands. We are participating in The Game – a much better game than than the one Michael Douglas has been part of in the movie: It is not an experiment set-up for a single person only, but it concerns at least the whole European Union, if not the whole world. Yet it is as kafkaesque as you had imagined in your weirdest and most paranoid dreams.

Readers who have managed to resist the urge to close this browser tab window and who have born with me will have noticed that this is not your typical Easter posting. It is not my typical geeky weird posting either though I might need to utilize some very dark humour. This posting is:

  • totally biased. You might be shocked about my very first forays into politics and economy.
  • not based on any sort of expertise. I am the guinea pig musing about the experiment.

Of course I am talking about the situation of what we call the Eurozone and our political leaders’ ongoing attempts to rescue our financial system and regain its stability.

Yesterday the Swedish member of the European Parliament, Gunnar Hökmark, has suggested a change in EU legislation, that would allow for seizing money from deposits above € 100.000 in the future. The likelihood is rising that tough treatment of big depositors will be written into a new EU law, making losses for large savers a permanent feature of future banking crises. (Source: Reuters: The European Parliament will demand that big savers take losses if their banks run into trouble…).

Savers in Cyprus with deposits above € 100.000 might lose about 40% of their savings, and this might happen in other countries in the futures.

Now game theory is at play when savers consider their options: Will you queue in front of the bank, take your money and run? Or will you stay calm and watch all those fools. The latter is the more reasonable way to do – in terms of the overall stability of the system, but nonetheless you are ***** if all other customers of your bank would withdraw money from their accounts before you.
[As for ***** – I am still an avid follower of rules and laws and I want to avoid the need of having to tag my blog as mature or whatever]

I have had a chance to experience this from the guinea pig’s perspective when one of Austria’s largest bank nearly collapsed as a consequence of their own private speculation-based crisis in 2006. The funny thing about this was that this bank was owned the Austrian Trade Union Association and I had once selected it – the conservative bank for cautious savers and workers – over all those banks who had just embarked on their risky ventures in Eastern Europe. An elderly coupled had been robbed after they had withdrawn € 400.000 from their deposits by a villain who had followed them from the bank to their home. The bank was rescued finally, and politicians opened saving accounts at this bank in front of TV cameras.

This may not let my moral capabilities appear in the best light but I frankly admit this was probably the first time in my life I was really, personally, existentially concerned with what I heard in the news everyday.

So of course I am thrilled about the chance to go through this again and feel the tsunami of instabilities starting to roll over Europe.  Actually right now I should do some research on cybersecurity and hacking smart meters, destabilizing the power grid. I have just devoured a compelling and well-researched German novel that lays out an apocalyptic, cyberpunk blackout scenario. However, I feel we manage to destabilize ‘the system’ without the helping hands of hackers, and based on IT that works as designed.

My compassion goes to the people of Cyprus, the hard-working savers in particular.

In the last years we had an ongoing discussion in Austria about introducing taxes on properties and assets (which we do not have today, in contrast to most other countries). From discussions about those I have learned the a majority(*) of people believes that you cannot own more than several € 100.000 unless you: are a criminal, have dealt with drugs, have inherited a fortune from your wealthy possibly aristocratic family whose wealth is based on crimes committed in the Thirty Years War, or you have benefited from risky financial deals based on all those derivative products I do not quite understand without a PhD in quantitative finance.
(*) It is a majority of online posters, but chances are it is the majority of the population. It is more than tempting to form an opinion about a minority of so-called wealthy people if you are part of the majority. Some bright lights of politicians here even wanted to make those taxes imposed on a minority subject to a referendum.

I cannot wait to read similar arguments again about all those fraudsters and banksters whom the crisis and laws like this serve right because they caused the crisis and should swallow their own poison now.

This. Makes. Me. Sick.

I have told you that this is neither going to be funny nor balanced, but it is probably time to add a disclaimer: I do not at all object against laws and political measures that would put myself at a disadvantage. I am in favor of a flat tax that would replace the intricate system of taxes, deductions, benefits, subsidies, charges, and so-called social insurance contributions which are a capped social tax in a sense anyway. It would probably leave me with less money but it would make the whole system simpler and cheaper – and this is an argument I can relate to a lot as a sensible citizen and taxpayer.

But I cannot relate to the argument of charging in particular so-called big depositors.

€ 100.000 is not a fortune – do the math: Imagine yourself being young – probably single, working in the right industry sector at the right time. Working your head off actually as you believe you would stop working like crazy in a few years and return to normal. Or take all the money and built solar power plants in Africa. Or fund an indie movie about a Star Trek like civilization that has abandoned money. No, I am not talking about starting a Zuckerberg-esque startup, sell it to an investor and retire. I am talking about working as a highly qualified expert in a sought-after field and being paid based on time and material. I guess, there are qualified lawyers, medical doctors, architects and IT specialists in Cyprus who own more than € 100.000 based on hard and good-to-honest work. Put yourself into their shoes and ask yourself if you would feel treated fair.

It is punishing people who do not follow the mantra of consumerism and let their monthly expenditure rise in proportion to their income. I have never understood why one needs to have a bigger car, bigger flat TVs (and a higher number thereof), vacations to exotic destinations if you earn more money, the latest communicator shaped cell phone including the holographic doctor feature. You might deposit your money to your favorite bank where you considered it safe. You might have selected some conservative, dull way of saving money – not some high risk speculation. You basically wanted to be compensated for increasing rate of inflation. But now the Cypriot architect might regret he did not buy a bigger house or swimming pool instead, or sign-up for the first parabolic flight for civilian space tourists.

But my – biased, uncalled for – theory is that there is a more subtle pseudo-ethical argument lingering in the minds of lawgivers and their consultants:
Money does not buy you happiness and many scientific studies do prove that you do not get happier if your monthly income raises beyond, say, several thousand euros. Due to whatever reason the argument seems to be reverted and twisted sometimes along the lines of: Too much money makes you a corrupt victim of your wealth, a modern age Ebenezer Scrooge watching the stock market tickers on his computer all the time – and donating a lower percentage of money than his poorer fellows do. I have indeed come across studies that seem to prove the latter (BTW as this is a post full of venting anyway, I do not give you any URLs this time not to break the subjectiveness. And BTW – off topic: I really like the movie Scrooged featuring Bill Murray).

On the other hand, every time some really wealthy person – such as Bill Gates or one of the few Austrian self-made billionaires, such as the founder of Red Bull, Dietrich Mateschitz – engages in charity or donates tons of money for whatever good cause there is an endless stream of mainly critical commentaries about: Why did they fund X and not the even better cause Y. Why did not spend even more. They better should donate as their wealth is built on illegal or at least immoral actions. This is just a big PR campaign for their company anyway.
So my pet theory is: Rich people cannot get it right anyway – no matter what they do or don’t do with their money.

Just to add a single sciencey link: Consider the stir the Milner prize had caused – a self-made billionaire funding a prize on fundamental research, a person donating his private money on disciplines that might lack funding in times of economic crises and budget cuts. Critics have complained about why money was given to established researchers, and why the selection is done by a non-scientists and his clandestine unknown advisors. And on and on.

The killer argument in an economic assessment is the utilitarian one (Philosophers among my readers – I hope I do not mess this up.): Politics should make sure that happiness or some moderate level economic wealth for that matter should be secured for a majority. This means that a minority, even an innocent one, not being accountable for the financial mess, would have to make sacrifices to save ‘the system’.

I have always agreed to this and I rather want a technocrat to be minister of finance or minister of social affairs – somebody who is able to calculate stuff and think in terms of the economical system as a complex network governed by some differential equations. It is sufficiently complex already to foresee that kinds of effect a new law may have. As a politician you simple cannot factor in every single heartbreaking story. My favorite example is the health system: Somebody needs to make a pragmatic and so to speak cold-hearted assessment of the value of a human being’s life. Otherwise you would not be able to decide on question as: Should a 105 year old patient be put on the list of people eligible for a heart transplant?

Having said that we would need to evaluate the impact of seizing large depositors money versus keeping private assets sacred. I am at a loss here: Trying to give an answer to this would require me to have access to the models experts in economy use to analyze the consequences of what they are doing. At least I hope they are using quantitative models. I have just a gut feeling that politicians deciding on this might not know exactly what they are doing – and it is tempting to go for something that will hit a probably not too popular minority. If the system is about crash, it might crash with or without those deposits being touched. We all might lose money anyway (with the notable exception of people being in debt and not bound to a fixed rate of interest).

As a deposit owner in the middle of the crisis I might feel a little better if I know that anybody is affected in the most equal way. My conclusion is that measures like this do not help at all to foster social cohesion. And though it makes the game theory experiment less exciting it would really help if politicians would speculate about such things in public.

I am not a big fan of online petitions as it feels like appeasing conscience with a click. But I would sign one that is called:

Stop the Eurozone Game Theory Experiment.

Let the system crash for heaven’s sake but stop probing what might happen if you tell millions of people their money might not safe be at the banks.

or as alternative:

This Cannot Be Real. Please Release Us From the Matrix. Red Pill for Everyone.

As I am not sure of this is reality or matrix we could also vote for:

Please Let Me Go Back to the Matrix. Blue Pill for Everyone.

Matrix like corridor

Matrix-like corridor: Where’s The Keymaker when you need him?


21 thoughts on “The Largest Experiment in Applied Game Theory Ever

  1. Pingback: Impolite and Humiliating Spam and Why We Really Need Tags for Spam Comments More than Time Machines | Theory and Practice of Trying to Combine Just Anything

  2. I just got into the rather low-paying security sector, but not only will I be able to pay off a couple thousand euros of debt in a year, I might even save some money. If I play it good, I will earn twice as much as I do today in ten years, while I don’t exect my expenses to increase much, unless I marry and have children, but then I exprect my wife to earn and save money as well. If I save €200 per month now, I will be saving €1500 per month then, possibly more. Considering that I prefer a tent over a hotel room, and beer over champagne, my vacations are also going to be modest expenses, nothing beyond €3000 a year; correct for inflation in 10 years by a factor of 1.2 – 1.5 if the rates hold. So, as a blue-collar man, I have a reasonable chance to accumulate that small fortune in my lifetime. Of course, I live in a city, so I don’t need a car, which means I don’t have to spend €20k every five years, and I don’t have to pay automobile insurance and taxes – only € 60/month for public transportation, which is 50% tax deductible.

    • Thanks a lot for providing such a real-life example! I should have included some blue collar jobs in addition to the architects and doctors I mentioned in the post, for example owners of small craftmans businesses. I think the key point really is “preferring a tent over a hotel room and beer over champagne”.
      I feel (that is: I did not do any research on this and I might be just see what my bias tells me) there is a growing number of people who seriously question what I call the consumerism mantra and stop spending all the money they earn without renouncing something – it is rather a lifestyle choice. Including “wealthy white collar workers”. The experiment currently done by a well-known Austrian comedian comes to my mind:
      Of course we are then breaks the standard political / economic theory that you need to motivate consumers to spend more in order to get the economy (based on alleged exponential growth forever) going. I have once read an excellent quote about the financial crisis (unfortunately I do not know the source any more – not verbatim, it was about Australia’s tax benefits for consumers in 2008 and 2009, very similar to what happened in Europe): Governments give people more money so they could buy stuff they don’t need to resolve a crisis that was due to people buying houses they cannot afford.

      • I just had the simplest,most elegant thought ever concerning the nature of economy: Like any complex system, it is easier to predict what happens when you don’t try to understand everything that goes on inside the machinery, but instead judge the course by observing a (set of) critical parameter(-s), in our case, growth: We know that a lack of growth (stagnation) causes a system to die due to inactivity, while too much growth causes it to burst, possibly violently explode. How wide is the stabile path? Is there a point of no return? An escape value?

        • You have nailed it down – I fully agree, and this is a typical physicist’s world view, I would say. The same way of thinking is applied to evaluating the security and stability of critical infrastructure (think hacking power plants). It is a much better way of dealing with risks associated with high impact and low probability as the traditional approach of trying to calculate risks (Impact, probability) based on things you know or pretend to know.
          In order to make the system stable / secure you would try to reduce dependencies and interfaces, such as turning off nice-to-have features that you don’t really need but which make come back to haunt you via strange feedback loops.

  3. Pingback: I Need More Trivial Content | Theory and Practice of Trying to Combine Just Anything

  4. This is very powerful, as all have said. Lately, I’ve been hearing a lot of media discussion in Canada about the ‘baby boomer’ generation that never retires, simply because they’ve over-spent and under-saved their entire lives. As a consequence, there’s no room for the rest of us in the job market, unless we’ve found our way to a job through newer technologies. I think that if this viewpoint is correct, then there is a social and ethical argument to saving.

    Being in our 40s, my husband and I hit the job market at a time when there seemed to be no space for us. We hustled these past twenty years, saved and played it safe. We’re heading into a state of semi-retirement in order to shift toward work that we both feel will offer more to others than the grind of oil field-related employment. So I can feel very deeply for those people who may be robbed of opportunities for doing the same, if they have chosen it.

    Also, you make a point at the end, about the instability of this action, suggesting that if assest seizing begins here, where does it end? So true. Any type of bias is a violence that threatens everyone.

    • Something like this (you and your husband’s plan) is what I had in mind when writing that. We are also in a transition stage which is based on “wealth” accumulated in previous years (as according to those discussions I often read wealth seems to be equivalent to owning a house and not spending all the money you earn every month). Of course I view the world’s economic situation from my specific angle. But I believe this is what anybody does.
      We also have cross-generation discussions in Austria.The Baby Boomer generation was lucky, as they have not suffered from war directly and have been raised and educated in times of constant economic growth. The number of qualified graduates was smaller and the job market less competitive. People born before 1950 managed to retire before the economic crisis hit.
      Somebody entering the workforce today feels he/she needs to pay for the Boomer’s pensions on the one hand through the (mandatory) governmental system and needs to find some additional saving plan (Financial markets? haha) to mitigate the risk that the pension paid by the state will be just meet some minimum bar in 30 years. It appears to be a Ponzi scheme and it does the social cohesion of society no good. Also the privileged – but probably envied – people are not necessarily happy with that.

      • This sounds eerily familiar, right down to the Ponzi scheme descriptor. the intergenerational tension has not been made easier with the elimination of mandatory retirement. All those jobs that were promised us after the boomers retired feels like the other promises that the younger generations received… get a good education and you’ll have a great career… there will be pension money for you, too… these high taxes are because we built so much infrastructure (which is now too old to maintain). I feel like we’ve been asked to follow our parents’ rules, in so many ways, but the game changed without us knowing. This is in part why I move between frustration and joy. I’m angry, because I feel I’ve tried to meet expectations. But then, because nothing else has worked, I also feel a joyful liberation from trying to be something I am not; I can give up on it and invent my own path, somehow figuring it out. If all else fails, I’ll ask my children to set me adrift on an iceflow so they can be rid of me when I become a burden. They can get on with trying to do things better.

        • As we both follow The Unemployed Philosopher … the “there will be many jobs when boomers retire” mantra was particularly true in academia. Here the Ponzi scheme would have been most obvious – as per the ration of professors over freshly minted PhDs. I have learned now that students have been told this BS since 30 years although it was true only in the 1960s.
          Thanks to bring this discussion back on a positive track though. Personally, I don’t have any reason to complain. If I wanted to, I would still work in a traditional corporate job as a “high performer” (see my post on the scary documentary). There are many reasons I deliberately discarded these options, and – as you say – one reason is the feeling of being entitled to do so because we need to re-invent the rules anyway.

          • I felt this issue really touching a nerve for me, which will be interesting to explore. It’s good to be confronted by one’s deeper worries… healthier than letting them sit beneath the surface.

  5. It’s time for the local Joe Doe to use the internet the same way as big companies are doing these days. Suppose you work for 3 different companies, online, over some vpn, you’ll get 3 salaries in whatever country, in whatever currency. All the time one spends on facebook to fill Suckerbergs wallet, we could spend to fill our own.

    • Sometimes I worked for several international clients in parallel, (mostly) via VPN, but they all paid me in Euros 🙂 Probably I would prefer Swiss Franks today. Re Facebook I am probably guilty as charged – we are the product, not the customers (Guinea pigs again) and should try to escape this matrix of this social network.

  6. Applies just as well to my size of the ocean too. If Easter is about new beginnings than this one counts too; a fresh, clear look at a problem that is, I am afraid, far too often obscured through a cloud of bulls*it.

    • Thanks, Maurice! I would really hope for some kind of new beginning – after all these years of so-called Rescue Umbrellas that appear as Ponzi schemes to me (but – I am not an expert). Happy Easter to Newfoundland!

  7. A tour de force! I wish I could ‘like’ it more than once. I think ‘the system’ as you call it is imploding. I’m well outside my area of expertise here as well, but I think the future of economics is in decentralized currencies, like Bitcoin, and peer-to-peer transactions. We’ll simply cut out centralized banks and state and corporate collusion that masquerades as “free markets.” Just my crazy libertarian two cents (or two bitcoins). By the way, you nailed the definition of utilitarianism. Well done on a very timely post!

    • Thanks a ton, Dan! It means a lot to me that in particular you – the philosopher – did like it! I left my geeky comfort zone quite a bit with this post, and it is probably my most “non-expert post” ever. As a naive member of the system I would also put my hopes in really autonomous decentralized structures – with respect to currency, energy and anything else that could causes strange dependencies and instabilities.

  8. Thanks a lot, Dave! I have really not been sure if anybody would like this as this post is outside my usual agenda.
    You are right – the system now cannot be stopped anymore. I think the key term really is “the system” and this is very similar as the phenomena we had discussed in relation to my post on the scary movie on the corporate world. I assume that many people, incl. politicians, want to do the right thing at their individual levels. However, it seems the system built from the individual human “components” has some emergent properties we cannot influence any more. Anybody with money in a bank account or a pension fund e.g. is a bit of bankster – and the hedge fond managers would say they just do this to serve their clients.
    It is very difficult to break out of the system as an individual and my critique is probably not fully justified – I do not come up with a full solution either. I think the root cause is that the current system is built on the assumption of permanent (economic) growth – biologists know that this is simply impossible in a world of limited resources, but economists do not. I tried hard though by attempting to gradually build up my own sustainable island. But I feel many people who still thrive in “the system” have started questioning the foundations of the systems. Let’s hope for the best!

  9. Wow. Nicely done. Now if only our politicians saw it this way. Why are these ideas so simple and straightforward to you and me and so foreign to our politicians? I cannot believe that self-interest motivates them to make dumb decisions – but it certainly seems that way. Money does corrupt … at all levels. Flat tax – yes. The inertia of the system is such that it cannot be stopped. It lives, it breaths, it consumes its various parts while growing others … to shut it down for a reboot would kill it. It cannot be stopped. As an evolutionary biologist I have often observed that humans are maladaptive, our future (speaking on the geological time scale) is not bright. A famous thinker once observed that humans have been here, in this form, for perhaps 200,000 years. The earth has been around for 4.5 billion years. Humans have therefore been here for just 0.005% of earth time. Round that figure. You get 0. We’re not here. Poof! Feel better? D

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