Crimea: Enter the Game Theorists (Late)

“How about a nice game of chess?”

I’ve seen a couple of articles now on how we should view Russia’s invasion and annexation of Crimea through a game theoretic lens. The articles which appeared in the New York Times and the Frankfurter Allgemeine Zeitung, which suggest that unfolding events should be understood and managed as stemming from rational actors in a structured situation, need a word of caution attached to them. In the case of Russia’s actions, game theory is one possible narrative or explanation among many, and not necessarily the one best supported by the facts. And accepting game theory uncritically can be dangerous, as it means uncritically accepting concepts such as “credibility” and “deterence,” which in practice often mean laying out and following through on a sequence of increasingly aggressive actions.

I have no beef with game theory. It can be a very useful analytic and research tool for the social sciences and my current research makes use of a couple of game theoretic models. But I am also very aware of the danger of fitting my preferred policy explanations on the very complex situations I’m studying. Whether my work which hangs a lot on “trust” is falsifiable is something I am currently worrying about. And I have the advantage of studying municipal utilities, so I have thousands of potential cases which I can use to test the veracity of my work.

But here we have only one case. If a game theorist had predicted Moscow’s invasion that would be one thing, my apologies if I missed it, but even the day before predictions of invasion were scarce to be found. Furthermore we have an alternative explanation, a psychological one, that clashes with the rational one offered by the game theorists:

An examination of the seismic events that set off the most threatening East-West confrontation since the Cold War era, based on Mr. Putin’s public remarks and interviews with officials, diplomats and analysts here, suggests that the Kremlin’s strategy emerged haphazardly, even misleadingly, over a tense and momentous week, as an emotional Mr. Putin acted out of what the officials described as a deep sense of betrayal and grievance, especially toward the United States and Europe. –New York Times, March 7, 2014

This second explanation, or narrative, strikes me as closer to the facts. Which doesn’t mean that game theory should be ruled out, just that it should, in the absence of scientific verification, accept its place as a competing explanation for a complex and evolving situation. As such scientific verification is unlikely to come, it is up to Western decisionmakers to use their intuition and judgement to decide how applicable game theory is. It is up to them and their advisors to determine whether Putin is in fact behaving rationally (or more likely, when he is, and when he isn’t), and how Putin defines his interests, his allies interests, and Russia’s interest (and whether they can get him to redefine any of these).

That Dr. Cowen uses the word “lens” in the title of his article suggests that he implicitly gets this. Dr. Milinski gives us a harder line (in German), that it “looks” like Putin must have used cost benefit analysis to decide to hold the Crimea. No, it does not look that way to all observers. And one must be careful because what one sees can be determined by the lens one uses. Until evidence suggest otherwise, we need to make use of all the lenses we have.

Whacky Versus Dull (Fear Dull)

Here’s some crazy art theory that I encountered on a tour of the Lenbachhaus in Munich. It and similar ideas were central to inspiring Kandinsky and his compatriots.

“Blue is the male principle, stern and spiritual. Yellow the female principle, gentle, cheerful and sensual. Red is matter, brutal and heavy and always the colour which must be fought and vanquished by the other two.”

Franz Marc

German Expressionist Painter, 1880-1916


And look what it got us, a blue horse! Why would you think to paint a horse blue? It isn’t exactly intuitive, so as outmoded as the theory is, it did bring us something new, and something we can react to.

Here’s something boring, but far more dangerous, we were exposed to a derivative of this by the EU Commission. Don’t worry, I’m not asking you to make sense of it. Your eyes should glaze over.

“The trilemma more directly relevant to this conference theme is a financial stability trilemma put forward by Dirk Schoenmaker (2008), explaining the incompatibility within the euro zone of a stable financial system, an integrated financial system, and national financial stability policies. By far the most high profile current trilemma, as per some analysts, is the euro-zone trilemma: the seeming irreconcilability between its three wishes: a single currency, minimal fiscal contribution to bail outs, and the ECB’s commitment to low inflation.”
-Inaugural speech by Dr. Duvvuri Subbarao, Governor, Reserve Bank of India.

Confused? I hope so. If the above quote makes much sense at all you probably inhabit a rarefied and abstract world not often visited by human beings. Nevertheless this incredibly convoluted theory, meant to update previous macroeconomic theory for the financial crisis and the situation in the Euro Zone, is being used to justify a series of broad reforms which sound a lot like the reforms that economists always argue for.

We don’t need to trust or believe Marc’s theory, we have a blue horse to react to, and if we’re intrigued we can dig into the theory later. But the EU Commission’s economists, whose canvas consists of 28 member states, 24 languages, 507 million people, and $16 trillion in GDP, just ask us to trust them. Of course we cannot expect them to prove that their plan will work, but a bit of humility would be warranted, as most any theory driving human action is eventually made to look more ridiculous than a blue horse.

Decline in Italian Design

How are Italian water services like Italian airport security?

They both go downhill.Declining Design 1

And that’s a good thing.

Gravity can be your friend and has been Italy’s friend since Roman times as water from the Alps has been directed to do what it does best: flow downhill. In doing so it quenches Italy’s thirsty crops and cities. And the result, says Dr. Antonio Massarutto of the University of Udine, is that Italy spends substantially less on pumping water than flatter countries such as Germany.

Not that all is calm in Italy. Like U.S. cities, Italian cities have underinvested in water infrastructure for quite some time. Legislation that was unanimously passed in 1994 to make up this gap resulted in, always unpopular, rapid tariff increases. The public expressed their displeasure in an initiative in 2011 in which 95% of voters voted to overturn a provision stating that tariffs must fully cover the costs but which was perceived (incorrectly) as guaranteeing profits for private companies.

Indeed, as elsewhere, privatization has become a political hot point. And sadly one withDeclining Design 2 the potential to distract from the underlying issue. That is when tariffs are kept too low for many years, substantial increases are needed to make up the difference, and in the short term customers will not see the value they are getting for their money.

The national regulator continues to require full cost recovery in the tariffs and whether it can do so is now in the courts. The court’s decision will be handed down in the next couple of weeks.

My conversation with Dr. Massarutto in Florence also covered issues such as raising private capital, the benefits of public participation, and subsidies to address income inequality. You can look forward to learning more in a paper I am working on with funding from the Alexander von Humboldt Foundation and hosted by the Ecologic Institute.

The solutions for sustainable water infrastructure aren’t simple anywhere. But as the very clever gravity operated system at the security line at Pisa airport demonstrates, sometimes you just can’t beat Italian design.