Grim's Hall

Game Theory:

Let's play a game.

Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.

Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.

“It will be a different business,” said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.”…

The industry says that the proposals will force banks to issue fewer credit cards at greater cost to the current cardholders.

You’re already helping to pay off deadbeats’ homes. Why not help free them up to rack up some more credit-card debt too?

I gather the theory is that people who work hard will continue to work hard, even though they are now benefitting much less and paying the freight for people who don't. Yet we know from game theory that sometimes ultimatums get rejected:

The ultimatum game is a game often played in economic experiments in which two players interact to decide how to divide a sum of money that is given to them. The first player proposes how to divide the sum between the two players, and the second player can either accept or reject this proposal. If the second player rejects, neither player receives anything. If the second player accepts, the money is split according to the proposal. The game is played only once so that reciprocation is not an issue....

In many cultures, people offer "fair" (i.e., 50:50) splits, and offers of less than 20% are often rejected. Research on monozygotic and dizygotic twins has shown that individual variation in reactions to unfair offers is partly genetic.

To say that this arrangement is at least "partly genetic" is a way of returning to the concept of "natural law." Humans in many cultures will flatly reject an unfair split of free resources: A and B are both getting something for nothing, but B would rather get nothing at all than get only 19% while A takes 81%.

That's in a case where A is dividing spoils which are free to both parties -- neither one has any ownership of the spoils until they are divided. In the current case, A is proposing to take property that belongs to B and divide it between them. Because A controls the political branches, he is in charge of setting the terms of the division.

B, however, still has an option available, as the Randians keep reminding us. Doc Russia explores the question in depth.

It's still a good game. Many of us may have a lot more time to enjoy life, in the near future.