Weeks 9 and 10

WEEKS 9 and 10

This was the last week of the term, at least as far as Advanced Analytic Techniques class was concerned. Professor Wheaton wanted to give the class the final week of the term to complete their individual articles and to prepare their results for publication. By the way, when I say "publication" that does not necessarily mean having the results of the studies published in a journal or other media. What it means is dissemination of the results to the outside world. Thus, that could mean a classroom briefing, a simulation, a website, a blog, or actually getting it published in a journal. Anyway, during Week 9, I abandoned my idea of a Google Site and decided upon the blog instead. With the Google Site, it would have been difficult to avoid creating a text-heavy website, whereas blogs are better suited for that. Also, Professor Wheaton recommended that I use a blogging tool known as Zemanta. Zemanta allows you to make your blog more interactive by analyzing the text and automatically generating images, articles, tags, links to other sites, etc. that embed in the blog with no effort from the user. Since I am a novice to blogging, this tool came in very handy. In fact, with the exception of the matrix and a few links I inserted myself, all of the tags, links to other articles, videos, etc. were embedded into my blog by Zemanta.

Anyway, back to the project. I created a new matrix (at the top of the page) which clearly indicates that Democrats have the advantage across the board. But, not so fast. The Republicans can still achieve a respectable payoff if they choose the right strategy. The highlighted box is the optimal strategy in this game. Both sides could move simultaneously, with no other rules in effect. Based on this matrix, both sides would prefer to cooperate with each other than not, given public opinion regarding financial reform, Democrats could easily decide not to cooperate and achieve a higher payoff relative to the Republicans, but not vice versa. This goes to the notion of the irrational player, which game theory cannot account for. That is, suppose Democrats, having repeatedly tried and failed to court Republican support for health care reform, decided that they were not going to cooperate with Republicans on financial reform under any circumstances. As is evident in the matrix, the Democrats’ potential payoffs under “don’t cooperate” significantly reduce, but, when compared to the Republicans’ potential payoffs (regardless of whether they cooperate or not) they still prevail, even though it is not rational to choose “don’t cooperate.” However, it is important to keep in mind that the highlighted cell is the optimal outcome of this game because neither player can improve his individual payoff by unilaterally changing strategies. That is, by cooperating, Democrats guarantee themselves a payoff of either 8 or 9 depending on what the Republicans choose to do, whereas if they choose not to cooperate they can only achieve a 6½ or 3. On the other hand, by cooperating, Republicans guarantee themselves either a 4 or 5 depending on what the Democrats do, whereas if they choose not to cooperate they can only achieve a 2 or 1. Obviously, this payoff matrix definitely favors Democrats, but they can maximize their payoff by cooperating regardless of what the Republicans choose to do.

So, with all of my research and tweaking of the model, I forecast that, in the end, Democrats and Republicans will cooperate with each other on financial reform. Based on the first matrix I developed, the outcome was the same, however, the payoffs drastically changed in favor of the Democrats. This is one of the main issues of game theory. An analyst needs the most current and most accurate information and has to account for any and all variables before developing a matrix, otherwise the forecast will not be as accurate as possible or could end up being wrong. Either way, it is no help to the decision-maker.

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