Prediction: How to See and Shape the Future with Game Theory

by Bruce Bueno de Mesquita

My idea is that the Israeli and Palestinian governments will distribute a portion of their tax revenue generated from tourism (and only from tourism) to each other. Before going into the details—where the devil resides—let’s first see why tourist revenue and not any other.

Tourism has a feature that can be exploited to improve the prospects of peace. You see, tourism and the tax revenue generated from it are highly sensitive to violence.

Clearly, more violence means a lot fewer tourists. In fact, on average, every violent death translates into 1,300 fewer tourists and 2,550 fewer hotel bed-nights sold to tourists.

Did Andersen make good use of this information? Sadly, they did not. After consulting with their attorneys and their engagement partners—the people who signed up audit clients and oversaw the audits—they concluded that it was prudent not to know how risky different companies were, and so they did not use the model. Instead, they kept on auditing problematic firms, and they got driven out of business.

As I pointed out to one of Andersen’s senior management partners, senior engagement partners had an incentive not to look too closely at the risks associated with big clients. A retiring partner’s pension depended on how much revenue he brought in over the years. The audit of a big firm, like Enron, typically involved millions of dollars. It was clear to me why a partner might look the other way, choosing not to check too closely whether the firm had created a big risk of litigation down the road.

When I suggested to a senior Andersen management partner that this perverse incentive system was at work, he thought I was crazy—and told me so. He thought that clients later accused of fraud must have been audited by inexperienced junior partners, not senior partners near retirement. I asked him to look up the data. One thing accounting firms are good at is keeping track of data. That is their business. Sure enough, to his genuine shock, he found that big litigations were often tied to audits overseen by senior partners. I bet that was true at every big accounting firm, and I bet it is still true today. So now we can see, as he saw, why a partner might not want to know that he was about to audit a firm that was likely to cook its books.

Models fail for three main reasons: the logic fails to capture what actually goes on in people’s heads when they make choices; the information going into the model is wrong—garbage in, garbage out; or something outside the frame of reference of the model occurs to alter the situation, throwing it off course.

The political world and the business world are vulnerable to unanticipated shocks. With the Rostenkowski experience in hand, I realized I needed to have a way to anticipate unpredictable events so that I could take them into account. But how can you predict the unpredictable?

John Lewis Gaddis, a world-renowned historian, now at Yale University but then at the University of Ohio in Athens, Ohio, invited me to spend a week with him and his students. Gaddis had written a paper in 1992 claiming that international relations theory was a failure because it didn’t predict the 1991 Gulf War, the demise of the Soviet Union, or the end of the cold war. Two well-known political scientists, Bruce Russett at Yale University and James Ray at Vanderbilt University, responded that Gaddis had not taken my predictive rational-choice work into account.1

The data on stakeholder positions were based on a measure of the degree to which each country in the world as of 1948 shared security interests with the United States or the Soviet Union. The procedure I used to evaluate shared interests was based on a method I developed in publications in the mid-1970s.2 The procedure looks at how similar each pair of countries’ military alliance portfolios are to each other from year to year. Those who tended to ally with the same states in the same way were taken to share security concerns, and those who allied in significantly different ways (as the United States and the Soviet Union did) were taken to have different, perhaps opposed, security policies and interests.

What did I find? The model indicated that in 78 percent of the scenarios in which salience scores were randomly shocked, the United States won the cold war peacefully, sometimes by the early to mid-1950s, more often in periods corresponding to the late 1980s or early 1990s.

What I found, in short, was that the configuration of policy interests in 1948 already presaged an American victory over the Soviet Union. It was, as Gaddis put it, an emergent property. This was true even though the starting date, 1948, predated the formation of either NATO or the Warsaw Pact, each of which emerged in almost every simulation as the nations’ positions shifted from round to round according to the model’s logic.4

About ten years after creating the static version I finally worked out a dynamic model I was happy with. That is the model I’m mostly discussing in this book. Over the past few years I’ve been working on a completely new approach based on a more nuanced game than the one I described back in the third chapter. Preliminary tests of this new model indicate that it not only yields more accurate predictions, but also captures play dynamics more faithfully.

I will apply this new model to some ongoing foreign policy crises and to global warming in the last two chapters. That will be my first foray into opening the opportunity to be embarrassed by my new approach.

HERE ARE QUESTIONS and brief answers about four really big events in history: Why did Sparta lose its hegemonic position in Greece just thirty-three years after victory in the Peloponnesian War? Because Spartans loved their horses more than their country. Why did Ferdinand and Isabella decide to fund Columbus? Because he agreed to work cheap. How could World War I have been avoided? By British sailors taking a summer cruise to the Adriatic. How could World War Ii have been avoided? By German Social Democrats making nice to the pope.

Death tolls from cataclysmic natural events are vastly higher in countries run by dictators than in democracies.

The male Spartiates elected their leaders by shouting loudest for the most desired candidates. How strong the shouts were for different candidates was determined by judges behind a curtain (or in a nearby cabin, unable to see, but able to hear the assembled citizenry) so that they did not know who voted for whom. In this way, the Spartans chose the two people who would simultaneously rule as kings (I said it was a strange and complicated form of government). They likewise chose the Gerousia (a select group of men over sixty who served for the remainder of their lives once elected), and the Ephors, who were elected to a one-year term.

The few remaining Spartiates—the richest citizens, as Xenophon reports—withheld their best horses and their best horsemen from the risks of battle.

So it was that Sparta fell quickly from monumental power to weak and vulnerable backwater. There was nothing to be done to save Sparta according to the game model. The victory against Athens sowed the very seeds of Sparta’s destruction.

Luís de Santangel figured out how to merge the interests of Spain’s monarchs with those of Columbus, to the benefit of both.

In fact, 1492 marked a major turning point for Spain. The defeat of Granada in January meant that all of the important kingdoms of Spain were now united under Ferdinand and Isabella. At last they were ready to turn to the proposal made by Columbus. His time had come, but the circumstances were not so much in his favor, and he knew it. The Talavera Commission had reported to Isabella in 1490 that Columbus’s plan was weak and advised against backing him.

In the model’s logic, Santangel first persuades Isabella and then Ferdinand to go along—at no out-of-pocket expense to themselves—and then he negotiates with Columbus. That seems pretty close to what actually happened.

The historian Niall Ferguson has argued that a big factor leading to war in 1914 was that the Austrians and Germans were uncertain of British intentions and that this uncertainty was caused by the British.3 Britain may have done well for a long time by muddling through, but that was not much of a strategy in 1914. Did the British really intend to defend Serbia, or were they bluffing? Certainly nothing they said or did at that time was sufficient to convince the powers of the Dual Alliance that defending Serbia was really important to Britain. This was an important failing on their part, and it deserves further exploration.

Britain was the world’s greatest sea power (although the Germans were certainly challenging that claim at the time). They could have filled several of their navy’s ships with a few thousand British troops to be transported to the Adriatic, taking them just a short distance from Serbia. Maybe they could have sent some other ships into the Bosporus, roughly flanking landlocked Serbia from either side. This would have served several potentially advantageous purposes. It is very much, in game-theory lingo, a costly signal. Talk is cheap, but sending a fleet into a prospective combat zone is putting your money where your mouth is.

Had there but been a thousand mathematicians crunching numbers in London in June 1914, we might not need to ask the next and final question of this chapter: Could World War II have been prevented by the judicious use of a predictioneer’s skills?

Right after the November 1932 election, while Hitler was angling to become chancellor, the Social Democrats and the Communists could (according to my model) have struck a deal with the Catholic Center Party, depriving Hitler of the two-thirds majority he needed. To do so, however, they would have had to move meaningfully in the direction of the Catholic Center Party’s policy desires, perhaps so much so that a member of the Catholic Center Party would have become the chancellor instead of Hitler.

Without Hitler, the capitalist, democratic world and the communist, totalitarian world led by Joseph Stalin might have butted heads in the 1930s instead of waiting for the cold war.

Back in the spring of 2008 and again in 2009 I taught an undergraduate seminar at NYU in which twenty terrific students in each class used my new forecasting model. This was a great opportunity for me (as well as, I hope, for my students) to find out how hard or easy it is to teach people with no prior experience how to become effective political engineers. Fortunately, my students were willing guinea pigs, and they did a great job.

The elections were postponed to February 18, 2008. Musharraf’s party was routed, while the parties of former prime ministers Bhutto and Nawaz Sharif, also recently returned from exile, won control of the national assembly (Pakistan’s parliament). Musharraf continued as president. Mrs. Bhutto’s husband, Asif Ali Zardari, became the new head of her party, the Pakistan Peoples Party (PPP), while the party of former prime minister Nawaz Sharif, the Pakistan Muslim League–Nawaz (PML-N), joined the PPP to form a coalition government.

Figure 10.2 tells an incredibly distressing story for any who hold out hope for stable democracy in Pakistan. Pakistan’s Taliban and their Afghan compatriots work together as one, so I present them as if they are one. Looked at this way, they are far and away the most powerful force within Pakistan.

The table tells us there’s quite a range of possible future relations between Iran and Iraq, and of course we need to play the game to work out what is likely to happen. From Barack Obama’s vantage point, Iraq ought not to be too quick to jump into bed with Iran. He thinks a policy around 0 on the scale is just right. That is, the Obama administration wants the two countries to go their separate ways while maintaining quiet at the borders, as is their obligation under the terms of their 1975 treaty.

The pope was the bishop of Rome and not much more. Between about 1087 and 1648, the political clout of the hurch rose and then fell. This happened, in my opinion, mostly because of a deal it struck with the Holy Roman Emperor in 1122 and with the kings of France and England at about the same time.

The best time to be pope was between the papacies of Innocent III (1198–1216) and Boniface VIII (1294–1303). Those were the days when popes really had it all—fame, glory, riches, sanctity, power. After that, they went into a long downward spiral, punctuated most noticeably by the Treaty of Westphalia that ended the Thirty Years’ War. The Treaty of Westphalia in 1648 formally made kings sovereign within their territorial boundaries.

My perspective is that the Church actively tried to hinder economic growth in the secular realm and that kings only really deferred to papal choices for bishops where and when they were forced to for economic reasons.

The agreement reached at Worms resolved the investiture struggle over bishops. Before Worms, the Holy Roman Emperor and Catholic kings sold bishoprics within their domain.

The Concordat at Worms breaks down and we are in a new world in which kings keep incomes in their territory and popes can pick whomever they want as bishops. That, of course, is essentially the situation for the modern Catholic Church. It remains a major religious body, but it is not a major political-military player.

The higher the income from a see, the harder it is for the pope to get his preferred candidate as bishop. Valuable sees require the pope to make sacrifices. He has to agree to a bishop who in a pinch is more likely to support the king than the pope—or else the pope loses income. This gives the pope a reason to stymie economic growth outside the Church’s domain. In fact, shortly after 1122, the Church adopted a series of new programs that were likely to hinder economic progress outside the Church. Was that a coincidence? We cannot know, we can only see that changes introduced by the Church—and by kings—after 1122 were consistent with their new incentives created at Worms.

Henry moved to protect property rights and rights of inheritance. These actions made it easier for peasant families to predict whether they would continue to benefit from the land they worked after the head of the family died or whether the lord of the manor would take away their opportunity to farm the land. Henry’s writs greatly shortened the judicial process for determining rights of access to the land and made for a more smoothly operating agricultural system. His new rules proved highly popular and effective in securing the property rights that are essential to economic growth, and they enhanced the king’s credibility as the person who would ensure order and justice in matters of property. Before the writs, tenant farmers were reluctant to invest in their land, but once Henry’s writs protecting property rights were in place, more effort was made by those working the land to produce more—for their own benefit as well as for the benefit of the lord of the manor.

Henry’s effort to strengthen his hand against the church was further reinforced by his use of the jury system to replace trial by ordeal.

The Church worked to keep income high within the ecclesiastic domain and low elsewhere. Kings worked to achieve the opposite, seeking control over courts and taxes wherever and whenever possible. Eventually, secular wealth became so great that, as the game implies, kings stopped caring who the bishops were. Kings no longer felt a need to keep the pope happy, and the dominance of the Catholic Church was replaced by the dominance of sovereign states in a secular world.

Frankly, we will see that agreements like the Kyoto Protocol and the efforts at Bali or Copenhagen to reduce greenhouse emissions, especially carbon dioxide emissions, are not likely to matter. They may even be impediments to real solutions. That is not to say that there is not good hope for the future. There is, because global warming produces its own solutions.

We’ll see shortly why that may not be so bad. The voice that dominates debate after 2040 or so is the voice of Americans who today are not convinced global warming is for real. The Chinese and the Indians support that American perspective, in the process convincing the other big players to adopt even weaker standards than those that were not enforced after Kyoto.

favor of putting real teeth behind global climate change standards. All of this may be leaving you rather depressed, but perhaps it shouldn’t. The likely solution to global warming lies in the competitive technology game that global warming itself helps along; it doesn’t depend on the regulatory schemes that are so popular among the world’s nations. These schemes, well-intentioned though they are, are also predictably vacuous. They are exercises in what game theorists call cheap talk. Promises are easily made but not easily enforced. Just look at the record of the signatories to the Kyoto Protocol.

When an agreement is demanding, lots of signatories cheat; when it isn’t demanding, there is lots of compliance with what little is asked for, but then there is also little if any beneficial effect. Sacrificing self-interest for the greater good just doesn’t happen very often. Governments don’t throw themselves on hand grenades.4