31/12/2012 03:48 GMT | Updated 27/02/2013 05:12 GMT

Psychology of the Fiscal Cliff

On Tuesday the world may tip over the 'fiscal cliff' and plunge into a new global recession. If this happens, the psychology of the relationship between President Obama and Republican representatives will have played a part in this.

In the so-called 'Prisoner's Dilemma' game, two conspirators, John and Peter, are locked in a cell. John can choose to rat on Peter and get a very light sentence, throwing Peter to the wolves of a long sentence. Peter can do the same. Alternatively, John and Peter can trust each other not to rat and they will get off because of lack of evidence.

In a one-off situation, game theory shows that the best strategy is to be the first to rat, saving your own skin. But if this situation is likely to recur, then questions of reputation and trust come into play: If John and Peter can come to trust each other, then the co-operation route becomes by far the most beneficial for both of them.

The fiscal cliff is a sort of prisoner's dilemma. Each player appears fixated on trying to rat to the electorate about the guilt of the other for the impending disaster. In the chaos following a fall down the cliff, the president and the Republicans each hope that they will escape with a light electoral sentence while the other is sent down for life.

While unfortunately in game theory terms this is the best strategy for each to take, for the rest of us it is potentially an economic crisis

It is, of course, only the best strategy if the situation is a one-off one. If the two parties anticipated a series of such situations, then the game-theory calculus changes, and, assuming that trust can be built and reputations for reliability consolidated, by far the best strategy is for neither side to rat to the electorate and to present a common, negotiated, face to their salary-paying citizens.

So why doesn't this optimal situation pertain? There are three main psychological reasons:

1. One-offness

Psychologically speaking for the two prisoners, this is a one-off situation and not one of an evolving relationship that could lead to trust and mutually beneficial payoffs. Why? - First, the Republicans are still bewildered and astonished to find President Barack Obama still in office. Carl Rove bewitched them and their Candidate Mitt Romney into the conviction of victory via his vast 'Orca' database.

Psychologically speaking, the whole of Obama's first term was a one-off in the minds of Republicans, with a huge and highly emotional effort to ensure no second term. Such was the disorientation, disappointment and sheer bewilderment that he was re-elected, that this 'one-off' frame of mind still appears to cast its shadow.

In President Obama's, mind, on the other hand, his intensive post-election campaigning to put electoral pressure on vulnerable representatives for the 2014 mid-term elections, there is also a bias towards 'one-offness': flush from a presidential victory, he likely anticipates that many of these Congressional opponents won't be around after 2014 and so what is the point of building trust, he may think?

2. Never underestimate your enemy

At one of President Obama's first appearances before Congress, Republican Joe Wilson shouted "you lie" to him. When the president asked to speak to a joint session of Congress, House speaker John Boehner, for the first time in history, refused his request. Among the many derisory comments was from Congressman Allen West who called his president a "low-level socialist agitator".

Obama may not have much respect for his opponents - his demeanor in the first presidential debate suggested he did not think highly of candidate Romney. While this may be understandable given the unprecedented level of vitriol and disrespect for a US president that he has experienced, the outcome of this mutual disrespect is mutual underestimation.

In competitions like this, 'theory of mind' is crucial, namely the ability to have a clear idea of what the perspective and hence intentions of your opponent are. Not only this, you must also be able to factor in to your decision making what the other's idea of what you are thinking - 'I know what you think I'm thinking'.

The more levels of 'think' an opponent has in their mental model of the standoff, the more effectively will they respond. But the trouble is, every human has a limit to the number of levels they can hold in their mind, and so outcomes can end up being randomly determined, with unforeseeable consequences.

The lack of respect and contempt which have been so predominant in the conflict makes mutual underestimation a real danger through putting insufficient effort in factoring in the 'what I think you think I think' to the calculations. Contempt has been a feature of the president's congressional opponents more than vice versa, and so their underestimation of his willingness to brave the fiscal cliff on the part of Congress may be a significant factor over the next three days.

3. Schadenfreude

The German word for gloating over other's misfortune is 'schadenfreude' - 'damage pleasure'. Unfortunately for many conflict situations around the world, a person can get as much pleasure from seeing a rival suffer as from being rewarded himself: the brain's reward network 'lights up' equally to both.

It is very likely that in this conflict, both sides would unconsciously relish the damage that will accrue to the other if their bluff is called and they have to reap the consequences of tumbling down the cliff.

Men are more susceptible to this sort of trap than are women and because such motivations are largely unconscious, such considerations play a crucial part in pre-deadline chaos of emotions where rational calculations may be thrown to the wind and gut instincts come into play. - It is in gut instincts that dark emotions like schadenfreude can cast their random, destructive shadows.

Psychological factors will influence whether or not we tip over the fiscal cliff and we will also need psychology to cope with the consequences if we do.