Game Theory, Explained
Panic buying seems to be more contagious than COVID-19 itself.
Spreading from country to country, often just before the start of a major outbreak, Singapore, Japan, Britain and the United States have all experienced this peculiar phenomena. Politicians across the world, including our very own minister Chan Chun Sing, have denounced this behaviour, painting it to be irrational and irresponsible. According to them, since supply lines were in check and since there were no disruptions to manufacturing, panic buying was absurd and frankly unexplainable.
But to what extent is that true? Have panic buyers really lost their minds? Or is there a way that we can rationally frame their behavior? These are the questions we look at, in today’s explained.
What exactly is game theory?
In trying to rationalise the seemingly irrational behavior of panic buyers, an understanding of one economic theory is necessary. Game theory, a field of economics popularised by Nobel Prize winner John Nash, is a complicated, yet elegant way of explaining interactions amongst people. To put it simply, game theory explains how and why people make decisions.
Each ‘game’ consists of a specific situation where actors make choices based on two things.
- The choices that other players make
- Benefit maximisation for self
|Wong Stays Silent||Wong Confesses|
|Tan Stays Silent||1 year for Tan, 1 year for Wong||3 years for Tan, 0 years for Wong|
|Tan Confesses||0 years for Tan, 3 years for Wong||2 years for Tan, 2 years for Wong|
Confused? Let’s try again, this time with an example. Assume that there are two bank robbers, Tan and Wong, who are brought into different interrogation rooms at Cantonment police station. Each bank robber has the choice to say nothing or to snitch and testify for the prosecution. If they both remain silent, then due the lack of evidence, they can only be convicted of lesser charges like loitering, which leads to one year in jail each (1 year for Tan+ 1 year for Wong = 2 years total jail time). However if Tan decides to testify and Wong doesn’t, Tan will go free while Wong will go to jail for 3 years (0 years for Tan who defects + 3 for Wong convicted = 3 years total). However if both testify against the other, each will get two years in jail for being partly responsible for the robbery (2 years for Tan + 2 years for Wong= 4 years total jail time).
Assume you are either Tan or Wong. If you think the other prisoner is going to stay quiet, you are incentivised to snitch (as you would get 0 years in jail). On the other hand, if you think he is going to snitch, you too would want to testify (as you would do 2 years instead of 3). Since both actors are thinking along the same lines, you are eventually going to end up at the situation where both parties confess. What you just read here is a famous thought experiment called the prisoner’s dilemma, and how it showcases that choices are codependent and aimed at maximising benefits.
Okay thanks for the JC Economics lesson, but how does this apply to panic buying?
|You don’t panic buy||You panic buy|
|Most don’t panic buy||Shortages unlikely.||Congrats, you’ve just wasted your money.|
|Most others panic buy||Congrats, you’re now hungry.||You’re likely to get some food, due to earlier buying.|
Oddly enough, the prisoner’s dilemma could be used as a framework when analysing the current panic buying that we see around the world. The two actors here are you, and everyone else in society. Both actors are competing and making choices based on what the other is doing.
There are a few possibilities here:
- As a Singaporean consumer, if I expect everyone to panic buy, I will buy such that I have food for myself. This leads to society as a whole panic buying, and severe strains on supply chains.
- Alternatively, if I don’t expect everyone to panic buy, I won’t panic buy, which helps avert the nationwide supply disruption altogether.
- If I expect everyone to panic buy, I can still choose to not personally buy. This choice is unlikely as you would want to protect yourself and your family members.
- If I don’t expect others to panic buy, I can still choose to buy in exchange for a sense of assurance. This choice is unlikely as well as you would be wasting money
As you can see, if everyone acts normally, we have the first equilibrium: no long queues at NTUC, Maggi Mee is stocked for everyone’s enjoyment. On the other hand, the second equilibrium happens if others start panic buying. In this scenario, you would want to do the same, if not you’ll be left without food and toilet paper. So at the end of the day, either no one panic buys (called a successful coordination) or everyone does (a coordination failure).
So how can we prevent a coordination failure?
There are multiple possible solutions here.
Firstly, markets can increase the prices of goods and services. This means that more people won’t be able to afford the goods and hence there will be a decrease in demand. The issue here is that price gouging is predatory, especially during times of crisis. While the rich would be able to afford essential goods at the supermarket, the poor would be left out and marginalised. This is precisely why the Ministry of Trade and Industry has been cracking down on retailers profiteering on masks across the island.
Secondly, considering that price gouging wouldn’t be tolerated by authorities, and considering that panic buying and the lack of supplies averts other potential customers, supermarkets are incentivised to impose restrictions on items. NTUC for example imposed a $50 restriction on vegetables, a 2-bag rice limit and a 4-packet ceiling for instant noodles.
Beyond these two market-based solutions, there is one other crucial thing that needs to happen. As discussed earlier, there are two possible equilibriums — either everyone panic buys, or no one panic buys. In order to get to the latter, Singaproeans need to believe that a majority of other people aren’t undercutting them by panic buying. The government, understanding this, responded in a few ways. Firstly, multiple ministers made reassurances that our supply lines were in check. The implicit message here was that the Sinagporeans panic buying weren’t undercutting you, because the country has enough resources to go around. In other words, there is no need for you to join this particular ‘game’ because there was no losing.
On a second tier, there was an active effort to characterise panic buyers as an undesirable, minority group. This can be seen when PM Lee Hsien Loong urged Singaporeans to “take courage” and avoid panic buying, and when minister Chan Chun Sing called panic buyers a “small group behaving like idiots” (albeit in a closed door meeting). Considering that this creates the impression that a majority of Singaporeans aren’t panic buying, I won’t panic buy either, leading to a successful coordination.
You haven’t answered the main question though. Are panic buyers Xia Suay and irrational?
No they aren’t. As you can see through the use of game theory, they are rational actors aiming to maximise their benefits. They are making choices based on what they think would yield the best potential outcomes for them and their families. Interestingly though, the government might still be justified in portraying them as such, as its leads to a game theory win and the best possible outcomes for society.