Financial crises are not fateful coincidences. A useful approach to depict the way financial interactions may lead to speculative escalations and alas to crises can rely on game theory. Meanwhile, in these frameworks, rational decision making processes are not realistic, because of the uncertainty underlying each situation. Strategic and self-governed games taking into account this uncertainty can then constitute a first step of justification towards collaborative but free governance of financing systems.
2. Global Financial Crises
Economic forecasts
1.The context
matters
2.Strategic
games
Incorrect use of information
Picky financial instruments
Uncertainty
Prisoner’s
dilemma
Institutional
frameworks
Rules, sanctions
and
communication
Financial interactions
Achieving greater
permanence in the real
economy?
Profit
maximization
Rationality
Incomplete
information
games
Collaborative
games
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3. Uncertainty is not an Insuperable Condition
Uncertainty is a situation
where outcomes cannot be
evaluated using probabilities.
Financial players make
investment decisions based
on their forecasts of future
profit.
The resulting strategic
decisions actually drive a
systematic escalation on the
markets
An underlying
condition
Different levels
Managing
institutions to
reduce uncertainty
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4. But Reducing Uncertainty has a Cost
Profit maximization?
Potential outcomes?
A random
behavior model
Environmental
adoption
‘The phenomenon
that produces
overlapping
distributions of
potential outcomes’
Realized positive
profits
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5. E. Ostrom (2005, p. 3)
“The
opportunities
and
constraints
individuals face in any particular
situation, the information they obtain, the
benefits they obtain or are excluded
from, and how they reason about the
situation are all affected by the rules or
absence of rules that structure the situation.
Further, the rules affecting one situation are
themselves
crafted
by
individuals
interacting in deeper-level situations.
(…) If the individuals who are crafting and
modifying rules do not understand how
particular combinations of rules affect
actions and outcomes in particular
ecological and cultural environment, rule
changes may produce unexpected and, at
times,
disastrous
outcomes.
Thus, understanding institutions is a serious
endeavor.”
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7. Creating a Collaborative Governance Model
Actors’ implication in rules’
elaboration and supervision
Face to face communication
Monitoring in question:
Trust, self determination, external
interventions
Such propositions are not easy to
apply to financial systems where
governance is generally entrusted
to international, public and
private institutions.
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8. Strategic Games
Linking market processes
and institutional contexts
using GT is possible
When uncertainty
prevails, actors can use
game theory in order to
choose the dominant
strategy to follow.
A Prisoner’s
dilemma
Global financial
crises:
Inescapable
situations for the
actors?
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9. Strategies, Interactions and Playground
Increased
credit offer
A Bank
Unchanged
credit offer
The bank foresees a situation
where its returns are
increased, and associated risks
are unchanged:
…….….Solution B (for bank 1)
and C (for other banks)
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10. Outcomes : solution A…
Bank 1
IC
UC
Other
banks
IC
A
(0,0)
RISK +++
Relative
returns +-
Solution A: Increased
risks, relative returns
unchanged (in the
beginning of the financial
bubble..)
Other
banks
UC
B
(1,0)
IC
C
(0,1)
UC
D
(1,1)
RISK +Relative
returns +-
Solution D : not better, as it
implies no lending
activities...
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11. Motivating Actors to Cooperation
For Ostrom, implies the construction
of a new game, based on clearly
specified rules and monitoring
processes.
Banks and the Central Authority are
supposed to know the ‘maximum
amount’ of credit to distribute in the
system.
This ‘amount ‘ is supposed to
prevent the system from any
financial crash, and the Central
Authority will manage against any
speculative escalation.
Cooperation
Snap up and
sanction
speculative
escalations
…complete
versus
Incomplete
Information
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12. However…Too Strict Conditions
The probability to be able to
sanction correctly behavioral drifts
must be higher than 75%!
Impossible at an international
level, where banks and
entrepreneurs are managing their
activities in a globalized world
The problem: the accuracy of the
information obtained by the Central
Authority..
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13. Another Solution:
Communication and SELF Governance
In a game where actors’ strategies
are not depending on the accuracy
of the information obtained by the
Central Authority.
2 Rounds for:
• A negotiation of a collective way
of functioning (under the form of a
contract)
• Contracting strategies and
enacting for a central authority
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14. Focus on Effective Realized Profits
As they progress with their market
operations, banks finally develop
convergent expectations on their
‘effective earnings’.
There is no one solution to this
game…
The main difference with the
prisoner’s dilemma is that there is
here a serious incentive for
cooperation.
A self governed game can constitute
a first step of justification towards
collaborative but free governance of
a financing system.
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15. Limits
One bank and a group of banks: big
players and followers?
Herding behaviors, experience …
If bubbles are initially nucleated at
times of burgeoning economic
fundamentals in so called ‘new
economy’ climates…
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