How to Play Chicken By: Gabriel PotterMBA, AIFA® 2019.05.15

Maybe you’ve seen the game “chicken” played out in a movie.  Two opponents are driving cars at each other at full speed.  One of them should swerve off the road or there will be a nasty car crash, but who is going to chicken-out first?  This model is often used by game theorists, political scientists, and economists as a metaphor for mutually-destructive games of brinkmanship.

You can probably guess where I’m going with this.  A giant game of chicken just started between China and the US in the form of an escalating trade war.  Both sides are pressing for the dominance in the terms of an ultimate trade-settlement, and both sides are also willing to damage their own economy and political security to achieve their goal.  Here’s the thing:  in order for the game of chicken to be played, both players have to think they are likely to win before the game is started.  If either player (or both!) are signaling weakness or capitulation, they won’t engage in the conflict.  We pointed out reasons in our newest article – The China Siege – why both players think they have the upper hand.

Here’s where the “Chicken” analogy breaks down:  in the traditional car contest, the conflict is resolved quickly. There is a car crash, or there isn’t.  In contrast, this ongoing trade-war could have many steps along the way including counter-tariffs, retaliation, escalation, entrenchment, and finally a sense of embitterment which makes good-faith negotiations difficult.  In a worst-case scenario, the leaders and envoys for either side might take these negotiations personally.  An irrational and Pyrrhic willingness to spite their opponent, preferring shared damage over mutually-beneficial outcomes, will leave the world poorer for nothing.       

 

 

 

 

 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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