Game Theory and The Greek Ultimatum Game.

Alexis Tsipras Leader of Syriza

Let’s start by explaining what ‘The Ultimatum Game’ is. It’s an economic experiment for two people which is used in Game Theory. We start with a sum of money, say £100 and we give it to one of the participants who we shall call the ‘proposer’. The proposer then offers a percentage of that £100 to the other participant, ‘the responder’. If the responder rejects the proposal then neither the proposer nor responder gets anything but if the responder accepts the offer made by the proposer then both walk away with the agreed sum. It is obviously in the interests of the proposer to offer the smallest amount that he thinks the responder will accept.

Now, theoretically, the responder should accept any amount that is offered, afterall, £1 is better than nothing but as you can probably guess that isn’t the way that this experiment invariably plays out because something far more fundememtal in human nature comes into play and that is ‘honour’. This experiment has been carried out all over the world, in many different cultures and the general outcome is that any offer below 20% will automatically be rejected by the responder. It would appear that it is of more value to the responder that he should deny the proposer his share than accept £20. The responder is insulted by the offer, his honour has been impugned, his sense of fairness has been outraged and, as a consequence he’d rather watch the look on the proposers face when he realises he’s not getting anything either than take a rational decision which would financially benefit him.

Firstly, we”ll divide this whole Greek bailout into two, the past (previous bailouts) and the present situation and continue on the basis that these are two different rounds of ‘The Ultimatum Game’.

We must assign roles, in the first instance the role of ‘proposer’ is ostensibly the EU,ECB,IMF Troika but in reality it is Germany that always must be completely satisfied with the nature of the proposal, and the responder has been, up until very recently, Greek politicians from the established political parties Pasok and New Democracy. Although it might appear that the Troika offered a very good deal to the Greeks in reality the bailout was in the self interest of the European banking system, Greece actually benefited very little other than the fact that it continued within the Eurozone and that at an extraordinary cost to social stability within Greece. Yet, under the circumstances the ‘responder’ accepted the very poor offer of the ‘proposer’. Why ? To answer that let’s look at what has changed.

Today the ‘proposer’ is still the Troika but the ‘responder’ is now held to ransom and can not act without the cooperation of Syriza and it seems that although Syriza would like to remain within the Eurozone and the EU it will not accept the Greek bailout plan that had previously been agreed. The Troika, especially Germany, must know that if they continue to push this then Syriza will make sure that there are not going to be any winners. Two things have changed, the first is that Syriza is not an establishment ruling party and therefore does not have the same reputational stake in the Greece’s continued Eurozone participation and the other thing that has changed is that simply by not  ever having been in power they are untarnished by corruption. A politician like Venizelos, leader of Pasok, was always more likely to make any deal and accept any offer, sacrifice any amount out honour because for him and his party there was always far too much at stake.

Of course, just because this is the way this second round of the Greek Ultimatum Game is lining up, doesn’t mean that it will play out that way but if Syriza continue to hold the whip hand then the far more common outcome, that has been seen in experiments across cultures, will likely come to pass and that is a rejection of any offer from the proposer that Syriza would find dishonourable and the Troika and Germany must understand that if that happens then they might lose everything too.