Mathematical Modeling and Financial Crisis

Many economists, since the rise of computing in modern academia, have trended towards heavily quantitative research in economics. This form of research has led to myriad attempts at "modeling" economic behavior or outcomes. Very often these models are based on equations borrowed from math or physics. One common form of behavioral modeling is known as game theory. In our econ department many classes discuss game theory, but if you have never discussed it, or no know very little about it, check the wikipedia article that provides a lot of valuable insight. In short though, game theory attempts to formulate behavior, in this case economic or policy behavior, into games in order to predict, or model, the outcomes of those decisions.

I know we have discussed Greece at great length but this blog post takes an interesting swing at trying to model the current "to bailout or not to bailout question," into a game. For me, the problems with game theory start at the very beginning. This particular author says "Of course, the following analysis will rest on massive simplifications and lack of formalization but I think, it can still add some valuable insights into the current situation." I tend to disagree though, I feel the simplifications are so vast that the models are of little use.

The article ultimately creates two models, one simple and one even simpler, and attempts to argue that "basically nobody wants to be the first to help Greece," but that a resolution is possible.

Ultimately, we have the benefit of hindsight in having a much clearer picture of what exactly is going to become of the bailout of Greece (although not all of the questions have disappeared). So what do you guys think of the use of game theory for economic modeling?