Using Game Theory To Resolve The Stalemate in Washington

Using Game Theory to Resolve the Stalemate in Washington:

Game Theory pertains to the strategies people use during every day interactions with others. It analyzes the consequences of those strategies, exposes the traps, and suggests ways to avoid them. Right now, congress is debating over funding government and raising the debt ceiling. Essentially we have a real life interpretation of the Prisoner’s Dilemma.

In the Prisoner’s Dilemma, Two members of a criminal gang are arrested and imprisoned. Each prisoner is in solitary confinement without a way to communicate. The police admit they don’t have enough evidence to convict the pair on the principal change, so they plan to sentence both to a year in prison on a lesser charge. The prisoners are offered a plea deal. If both stay quiet, each serves 2 years in prison. If one confesses and the other denies, the one who confesses goes free and the other goes to jail for 3 years. If both confess, they both serve 1 year in prison. Betraying your partner by confessing rewards more than cooperating with the police, so all purely rational self-interested prisoners confess and take the lesser sentence.

For the sake of argument, let’s say we have House Speaker John Boehner on one side and President Obama on the other. So we have them on opposing sides and the battlefield of public opinion in the middle. What is on the line in this situation is the possibility of the United States defaulting on its loans. By defaulting on the loans, everyone in the world, without hyperbole, loses. It would likely cause a global financial collapse that would make 2008 blush.

Boehner doesn't want to pass a clean continuing resolution or debt ceiling increase without significant budget cuts and Obama doesn't want to defund The Affordable Care Act or sign a non-clean debt ceiling increase. Economists and the general public are less concerned about how a deal gets done as long as it gets done.

What we have is tantamount to the Cuban missile crisis or two cars driving full speed at each other playing chicken. Swerving and giving in to the others demands is worse than not swerving, unless neither swerves, because then we’re all dead.

We do have an extra player in this game though, and that is the public. If Obama can shift public opinion so they blame Boehner and the republicans, he may be willing to allow a financial collapse. Given the tide of public opinion at the present moment, Boehner doesn’t even appear to have that option.

If Republicans continue fighting right up to the debt limit, they will have to answer to voters for the economic mayhem a default would cause. Obama on the other hand doesn’t have to worry about reelection. For Obama to back down and gut Obamacare, he would have sacrificed his greatest achievement and confirm his lame duck status. He’s not likely to give in.

Using this logic, (which I’m unsure we can consider Congress logical) Republicans should back down quickly and just take when they can get. Obama should offer republicans some minor concessions like giving into the keystone pipeline, cutting the medical equipment tax, or agreeing to revenue neutral budget negotiations. A positive resolution from this situation could have history reflecting very positively on President Obama and less critically on Republicans, which would be a win for both of them.

This type of rational solution seems so simple in Theory, but Theory hardly ever survives its first brush with reality. We've also come to learn that rationality is something that may be a thing of the past in Washington. 

If Congress Can't Reach A Deal, it wouldn't be the first U.S. Default

 If Congress can’t reach a deal, it wouldn’t be the first U.S. Default

America has briefly not been able to pay its bills on two occasions. The first time was when the White House and Capital were burned during the war of 1812. The second time was in 1979 when a back-office glitch ended up costing taxpayers billions of dollars. That was also blamed on bickering lawmakers who couldn’t agree on a backlog of paperwork. In 1979, it was lawmakers determined to attach a strong balanced budget amendment to the bill the caused the shutdown. They finally relented, the day before Social Security checks were expected to start bouncing.

Congress is still locked in a heated debate that could torch that economy, but at least Washington isn’t literally on fire. 

The Extreme Pragmatism of Wall Street Traders

 The extreme pragmatism of Wall Street Traders:

Art Cashin told a story on Tuesday at Barry Titholtz’s Big Picture conference that illustrated the mindset of all good Wall Street traders. In the days before the Cuban missile crisis, Mr. Cashing was a young trader. A rumor exploded that the Russians had launched their missiles and that World War III had commenced. Mr. Cashin ran across the street to find a senior trader who was in a bar having a drink. Breathless, he conveyed the news. The senior trader told him to stop and have a drink. After everything was explained, the senior trader told him, “Buy. Don’t sell. Buy.” Looking back in wonder Mr. Cashing asked, “Why?” The response was cool and calculated, “Because if you’re wrong, the trade will never clear. We’ll all be dead.”

The cool pragmatism of the senior trader took what should be an emotionally charged situation that prompts thoughts of mortality or the end of the world and turned it into a trading opportunity. The ability to trade on news of impending doom makes these guys great at their jobs… and sociopaths.

The Cuban Missile Crisis has been oft used as an allegory to describe the debt ceiling battle currently going on in Washington DC. Both sides are not budging and the threat of default, which is playing the role as the missiles in this crisis, guaranteeing destruction for all. In the midst of all this, some traders see opportunity. As the market goes up and down (mostly down) in response to the budget and debt ceiling talks, some traders are buying during the dips. Most believe that much like during the Cuban Missile Crisis, a deal with be struck in the 11th hour since neither Democrats nor Republicans really want to blow up the world. After all, they they aren’t sociopaths… right? 

Curious Trend of Declining Student Attendance in College Football

The Curious Trend of Declining Student Attendance in College Football: I was at a college football game in the MAC last week. It was the team’s homecoming and they were playing a hated rival, yet the stands were empty. Granted, there was supposed to be and eventually was a huge rain storm, but I was surprised nonetheless. This trend of empty stadiums seems to extend beyond the MAC into other conferences including the SEC. Given all the talk of the money in college football (justified), you'd never know that nearly 40% of the seats in the Georgia Bulldogs student section were left open over the last four seasons. During the same time, Alabama left 32% of their student section seats unused while winning three national championships. Even The Ohio State left 26% of the student section vacant last year. What is going on?

This emptying of stadiums is occurring in even the nations proudest football traditions. It has been attributed to poor cellphone reception within the stadiums, convenience of watching the game next to a keg of beer and a flat screen TV, or a desire to watch other games playing throughout the day. In the SEC, alcohol sales are banned to the public, so some students report preferring to watch in a bar or at home while multitasking, because they just have better things to do. There is nothing like being in a packed college football stadium, the energy contained within it could power the world for an afternoon. Athletic departments around the country are hiring researchers and consultants to identify why students aren't coming and how to get them back in the stands. Fans are fundamental to the sport of college football and are a huge advantage for home teams in close games. I'm not sure what the solution is, but I really hope someone finds figures it out. It probably won't be me though, I've got a date with my couch, flatscreen, and a beautiful IPA to watch college football all day.