PREDICTABLE SURPRISES
Game theory is a branch of economics that consists on applying mathematical models to explore how people
approach making strategic decisions based on goals and constraints. Using hypothetical situations or ‘games’ where people face uncertain outcomes based on a set of possible decisions, game theorists have developed optimal courses of action by the different players involved assuming rational behavior. Some of those ‘games’ have names such as the ‘ultimatum game’, the ‘game of chicken’ or the ‘prisioner’s dilemma’
One of the world’s best known game theorists is Bueno de Mesquita. He built a simulation model to determine
how different players were likely to behave based on maximizing their interests subject to a set of constraints on goals, motivations and influence. Based on those parameters, the model then considers available options for each player, likely course of action and degree of influence on other players and most likely course of events.
Back in the Summer of 2009, he applied the model to the Iran nuclear development programme. The model
involved nearly 90 players, including Iranian leaders, religious radicals, groups like the U.N. Security Council and top national security players in Israel, United States, and other major economies. The model objective was to estimate the chances that Iran would develop and test a nuclear missile, ranking that event from 0 to 200, where 200 represented that Iran has succeeded.
At the beginning of the simulation, the model predicted that Iran would start with the development of the nuclear
programme while other countries opposed it diametrically. However, as time went by, Iran would be persuaded not to continue with the development of a nuclear bomb due to increased opposition and isolation. Leaders in Iran, Israel and the United States would do the sensible thing and realize that the risk of a bloody military confrontation with unpredictable consequences would not be worth it. Interestingly, the model suggested that the optimal course of action for the United States was largely to sit idle and continue to apply diplomatic pressure through sanctions to isolate Iran’s regime. The end score was 118, indicating that Iran would not conclude its efforts to build the bomb.
Game theory also shows that under certain conditions, people do not reach mutually beneficial outcomes even
though the end result may be considerably worse for them. While game theory has an impressive track record when the players involved act ‘rationally’, it does not handle ‘irrational’ players well.
Three years after the simulation was conducted, events are not playing out as expected. Oil market signals may
be telling us that it is time to prepare for the worse. Given the current tension levels, a misstep by one of the players involved could trigger a crisis.
“This crisis may well be a Black Swan and the events that we are about to witness may well change the course of history.“
March 2012 33
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