Bookstaber goes from this to argue that game theory is inadequate to describe the resulting interactions because games always have rules, whereas in markets, participants often break rules or understandings (insider trading, securitization sponsors failing to adhere to the terms of pooling and servicing agreements, major banks giving big institutional investors crappy execution on foreign exchange transactions, to barely scratch the surface). He contends that the best model is warfare, which of course appeals to the macho self image that most Wall Street denizens harbor.
But what are the characteristics of war? Unless the engagement is via proxies or a mere skirmish, it involves a serious commitment by both parties, usually so substantial that neither side can readily withdraw (both that it has put its prestige at risk, so that the usual “sunk cost” analyses are put aside, or that withdrawal is tantamount to capitulation and allows the enemy to inflict additional costs (via conquest or a punitive peach treaty) which could be catastrophic, at least as far as the leaders are concerned. War by its nature is potentially a test to destruction. And that is precisely how the banks have played it. And they can escalate their degree of commitment and the damage ultimately done, by virtue of having state guarantees.
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