An art thief, the U.S. President, and Democratic party leaders could all share the same dilemma.
Let’s take a look.
The Art Heist
On May 20, 2010, a thief called Spiderman stole five paintings from a French museum. After removing a window and avoiding the alarms, he left with works done by Léger, Matisse, Modigliani, Braque, and Picasso. Their value? $70 million or so.
The stolen Léger was “Still Life With Candlestick”:
The thief’s voicemail even said, “If you want to buy paintings or works of art, or exceptional jewelry, do not hesitate to contact me. Among the many paintings, there are five that are extremely expensive.” So yes, months later the police arrested the man who did the heist and the two men who were trying to sell the paintings for him. While one confessed and the others did not, all were convicted. Now serving sentences from 6 to 8 years, they won’t say where to find the stolen loot.
And this is where economic theory enters the picture.
If they all know where the paintings are hidden, it’s to their advantage to act together when they leave prison. However, one cannot be sure what the others will do. If one of the three acts in his own interest first then the others will suffer. But if they wait, they could all benefit. Assuming they cannot coordinate a strategy in jail, each has to decide which course of action is optimal. Each needs to understand game theory.
December 22, 2018 was the first day that the U.S. government partially shut down. For it to open, politicians need to negotiate an agreement on issues that relate to border security and immigration. Like the art felons, they are figuring out a balance between between cooperation and competition.
Also like the felons, their individual goals differ. Consequently, each has to decide how much to sacrifice for a mutually sought outcome.
Our Bottom Line: Game Theory
Sometimes you have to know what your opponent will do in order to decide how to act. The problem though is that it’s all a prediction. You have to figure out your response before you know what to respond to. What you do can be explained by game theory.
A classic example of game theory is called the prisoner’s dilemma. When two partners in crime are arrested, one knows that if he confesses and his partner does not, then he will go free. But if both keep quiet, they both go to jail for one year. Because they are questioned separately, no one knows what the other has said. But the results depend on how much the other person admitted.
The dilemma: Keep quiet or confess?
Called the economics of cooperation (or non-cooperation), game theory explains the prisoners’ alternatives. When big businesses compete, game theory provides insight about their pricing strategy. In a soccer game, we can use game theory to understand shootouts.
And, when President Trump, Speaker Pelosi, and Minority Leader Schumer negotiate the end of the shutdown, each one’s strategy relates to game theory.
My sources and more: In an excellent piece, The New Yorker told about the Paris art heist. Meanwhile, in 2014, Quartz focused on soccer shootout game theory and The Economist had a good discussion of how game theory works. But if you just read one article, do look at this John Nash obituary.
Please note that sections of today’s Bottom Line were in a previous econlife post.