John Kay - Rock’s fate should not be a game of chicken

Rock’s fate should not be a game of chicken

The chicken game, which frequently ends in tragedy or folly, is a game for movie-going teenagers, not grown-ups.

The game of chicken is well known to a generation of movie-goers. In Rebel Without a Cause, James Dean and his rival for the affections of the lovely Natalie Wood drive their stolen cars towards a cliff: the winner is the last to jump. In Stand by Me, two cars are driven directly towards each other: whoever swerves first is chicken. Rebel ends in tragedy, Stand by Me in folly.

The moody teenagers who once drooled over Natalie Wood are today managers of hedge funds, executives of companies, civil servants and cabinet ministers. They play chicken not with their lives, but with other people’s money. They play it over the fate of the troubled mortgage bank, Northern Rock.

In one car are the investors John Wood of SRM and Philip Richards of RAB. In the other, the publicity-conscious tycoon, Sir Richard Branson, and Alistair Darling, the publicity-shy chancellor of the exchequer. The stakes are the payout to the company’s shareholders.

The winner of chicken is the person still in the game when all others have left. But if no one gives in, there is a crash. The potential car wreck here is that Northern Rock goes into administration, an outcome from which everyone will lose.

As with all games, the outcome for each player depends on the strategy of the other. Both players begin in similar situations.

Yet if they follow identical strategies, the result is unsatisfactory. If both parties back down, both lose face. If, worse still, both parties stick to their positions, the result is a crash.

Some of the movie-going grad students didn’t score with their girlfriends; instead they went back to their dorms and worked through the mathematics of chicken. Some of the students became evolutionary biologists who looked at the effect on population dynamics. Others learnt to be mathematical economists and to construct efficient and rational strategies for the players. Both groups have insights into this – and similar – problems.

The evolutionary biologists play the same game with different birds. They distinguish hawks – genetically programmed to fight over every morsel – and doves – temperamentally disposed to compromise. Populations tend towards stable proportions of hawks and doves. A few hawks among doves do well, but once the proportion of hawks rises above a certain point, the losses they incur by fighting among themselves outweigh the benefits they gain by snatching food from the doves. This model alone accounts for a lot of what we see in the financial system and its susceptibility to boom and bust.

The economists discovered that it often makes sense to play what is called a mixed strategy – to randomise your behaviour. If this seems to contradict all we know and value in decision-making – clarity, decisiveness and consistency – the explanation is that your decision is most unpredictable to your opponents when it is unpredictable to you.

The mathematics of chicken comes into play when there are few differences between the players, or when we do not know what they are. But there often are such differences and these may point us towards a solution. It helps to have a reputation for being a little crazy: if you are especially likely to stick, I will be more inclined to give in. Some people argue that this was how Ronald Reagan won the cold war. If you play these games often, it will be worth building a reputation for playing hard. Hawks and doves can co-exist only if you are never sure whether you are dealing with a hawk or a dove.

So who will swerve first in the current chicken game? There is an asymmetry: a car crash will do more damage to the government than to the hedge funds. That is why the latter have a strong position. And in that lies the real lesson. Chicken, which frequently ends in tragedy or folly, is a game for movie-going teenagers, not grown-ups. Sensible people do not have to devise strategies for chicken games because they avoid playing such games in the first place. How such an outcome could have been accomplished in the Northern Rock case will be the subject of next week’s column.

 

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