Saturday, September 29, 2007

Game Theory and Northern Rock

There is a fascinating article over at Slate Magazine at the moment that places the recent crisis of confidence over Northern Rock in the context of game theory.

The article refers to a classic game theory problem of hunting stag versus hunting rabbits. Although half a stag is worth more than a brace of rabbits, hunting stag requires you to cooperate with another hunter, so the outcome relies on your trust in the skill and intention of another hunter. Hunting rabbits carries no such risk.

The people withdrawing from Norther Rock were hunting rabbits. They knew that there wouldn't be a big problem if no one chose to withdraw their savings from Northern Rock, but as everyone did (or rather the impression was given that everyone was) they were compelled to withdraw themselves, exacerbating the problem.

The key point the article makes is that the main difference between rich countries and poor countries boils down to the confidence people have in "the system." In the reliability of the state, the law, and the money.

So much that I take for granted is based on promises made by various organisations. I know my money will be safe and available for conversion into material assets because a company (my bank) tells me that this is so. I know that I am safe from foreign invasion because the state tells me this is so. I know the state will not harm me because the state says this is so. I know this post is available to millions, should they seek it, because Google says this is so. I know my computer is secure and functions satisfactorily because Microsoft says that this is so. I know that when I queue up behind someone I will be served immediately after them, I know this because social convention says it is so.

No one is an island. States and companies are superhumans in their sheer capability. I don't think ideological anarchists stand a chance of living in a world where their ideals are realised. We are all interdependent. It's like that Bob Dylan song: sooner or later you gotta serve somebody.

This is all fairly depressing. But at the same time it is fairly comforting. I am always going to be part of something, whether I like it or not.

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