Friday, February 24, 2012

Ethiopian Bank Run Friday

There was a run on the bank today. I nearly missed it.

All of us at the conference were told to visit the bank to get refunds and daily stipends. We could only do so today, and we could only do so during one of two coffee breaks. To someone teaching Game Theory this semester, this sounded like a perfect set up for a simple coordination game.

I played a waiting game. I dislike waiting. When I observed most of my colleagues heading across during the first break, I decided the clear game solution was for me to wait to the second coffee break so I wouldn't have to wait so long in line. They indeed got back late, it taking more than 45 minutes to service them all.

When I eventually went with just three other colleagues, I was feeling pretty good about my choice. But then one of us told a joke: the bank was out of money and would only have enough for him and not for us.

I suddenly realized that if I were in a bank run game, I had played the entirely wrong strategy. Observing other people racing to get their money out in the early period, I ought to have gone early also. We covered that extensively in the Cornell macro group – sunspots determining bank runs, psychology determining bank runs, self-reinforcing beliefs, on and on. If you see other people running, run.

When I get back to AUN, I will be introducing my game theory class to risk and uncertainty. What if there is a probability p that I’m playing the bank run game and probability (1-p) I’m playing a waiting game? At what critical value of p should I go with the first group instead of with the second? I smell a midterm question. And if you’re in Eco 404 this semester, you’re welcome.

1 comment:

  1. Unlike the Federal Reserve, it appears that some central banks are unwilling/unable to.prop up failing banks.