This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

GOP the Favorite in Debt-Crisis Game

NEW YORK ( TheStreet) -- Negotiations to settle the U.S. debt ceiling have entered a new a serious stage with a possible catastrophic outcome of a default on U.S. Treasury bonds.  

But for analysts and academics, the endgame favors the Republicans.

 

For many on Wall Street, how the debt negotiations play out over the coming days fits perfectly into "game theory," a specialty of mathematics that studies strategic decision-making. The practice was made famous by the 2001 movie A Beautiful Mind about the Nobel Prize-winning game theorist John Nash, portrayed by Russell Crowe.  

Game theory is a passion of many Wall Street analysts and hedge fund managers, especially quantitative analysts (or "quants") that use it as the basis for everything from pricing options to trading billions of equity shares every day.

But game theory can also be used to study politics, including the current debate in Washington over the debt ceiling and a possible U.S. default.

Game theorists agree that the debt-ceiling debate fits perfectly into their realm and many understand which game Washington is playing.  

"I think the more relevant game analogy here is 'chicken,'" says Benjamin Polak, professor of economics at the Yale School of Management and a noted expert on game theory.  

Polak explains the chicken can best be described in Rebel Without a Cause starring James Dean. In the movie, two cars drive toward each other and the possibility of a horrific crash. James Dean can choose between "swerving" and remaining unscathed but risking humiliation, or he could remain "tough" and come out a hero but risk death.   

"The best outcome for each individual player is that they remain tough and the other swerves," Polak explains. "The worst outcome for each player is for neither to swerve."  

In terms of the debt debate, Polak explains, that would mean the "optimal" outcome for both Democrats and Republicans is that each side compromises and "swerves" to avoid a U.S. bond default.

"In terms of game theory, both swerving is a little better than swerving if the other remains tough," Polak adds.  

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $128.95 0.00%
FB $78.99 0.00%
GOOG $537.90 0.00%
TSLA $226.03 0.00%
YHOO $42.51 0.00%

Markets

DOW 18,024.06 +183.54 1.03%
S&P 500 2,108.29 +22.78 1.09%
NASDAQ 5,005.3910 +63.9670 1.29%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs