Greek Finance Minister Yanis Varoufakis Relying On Game Theory?

March 9th, 2015 | by Greg Shaun

Greek Finance Minister Yanis Varoufakis is rumored to be employing game theory into his decision making, a strategy that is also used by the top pros in poker. (Image: businessinsider.com.au)

Greek Finance Minister Yanis Varoufakis is adamantly denying various media reports that claim he’s using game theory to navigate his country’s devastating economic situation.

An author of several books on game theory, Varoufakis recently wrote in a New York Times op-ed piece, “Because I spent many years during my previous life as an academic researching game theory, some commentators rushed to presume that as Greece’s new finance minister I was busily devising bluffs, stratagems and outside options, struggling to improve upon a weak hand. Nothing could be further from the truth.”

Many believe Varoufakis is using the theory to negotiate with European Union member states regarding Greece’s debt program, a â‚¬110 billion ($121 billion) bailout loan first approved in 2010. Following the snap election in January, appointment of Alexis Tsipras to prime minister and subsequent selection of Varoufakis to the finance chair, Greece’s seven-month standoff with EU nations over scheduled repayments on the massive loan continues.

Big Fat Greek Loan

Greece was on the verge of economic ruin when the EU stepped in to help five years ago. Since then, the country has climbed out of the deep recession and showed signs of an improving economic environment.

Fiscal reform and structural changes have led to a more balanced economy, but Europe’s most indebted state isn’t solvent enough to act on its payments. Athens has to find a way to repay or refinance 6.5 billion euros ($7.2 billon) over the next three weeks. If it fails to do so, that number only rises as additional interest is incurred.

Varoufakis is arguing with EU leaders that the loan program his country received is economically flawed. He claims the hefty payments only strain what success Greece has experienced, and will ultimately cause a financial recourse. “Our government is not asking our partners for a way out of repaying our debts.

We are asking for a few months of financial stability that will allow us to embark upon the tasks of reforms that the broad Greek population can own and support, so we can bring back growth and end our inability to pay our dues,” Varoufakis wrote in February.

Game Theory

Varoufakis’ strategic hard bargaining and game of chicken with the EU seems to resemble game theory, a decision concept that is used not only in economics and politics, but also poker. Rock-paper-scissors is the prime example of game theory. To win, players must read their opponents to make the best decision.

Poker pros also use game theory in their runs to becoming the table’s big stack. Advanced competitors are able to identify how others are going to react to a bet or call, eventually giving them the ability to influence their opponents. Although game theory is a complicated and lengthy subject, as it relates to poker it is a rather straightforward principle.

Game theory asserts that poker players will take the securest paths to give them the highest chances of success.

The key is to disguise how you travel that path, masking your moves as “secure” when in reality you’re manipulating your opponents.

In his 1944 book on game theory, concept author John von Neumann wrote that players should always bluff with their worst hand, not a mediocre or average hand.

If betting is slow, limp in with a call even if your hand isn’t the strongest. A bad hand won’t win unless everyone folds, so your chances are good against other mediocre hands.

Since the concept is to win the entire tournament and not just a single hand, players occasionally shouldn’t maximize the financial capability of a great hand in order to achieve long-term success.

Of course, like any science, game theory isn’t perfect. However, one can speculate that the overwhelming majority of professionals likely utilize game theory to a certain degree.