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Did Greece score an own-goal with game theory?

The high-stakes negotiations between Greece and its creditors have drawn attention to "game theory" and one of its biggest fans, former finance minister Yanis Varoufakis.

Game theory is a mathematical study of decision-making and strategy in social situations and can help explain how two parties interact in decision making.


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Varoufakis, who resigned on Monday as Greek finance minister, wrote in the New York Times in February that his game-theory background convinced him that it would be "pure folly to think of the current negotiations between Greece and our partners as a bargaining game to be won or lost via bluffs and tactical subterfuge."

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Still, experts say that there are some signs that game theory has been used by Greece's negotiating team in recent weeks.

"Varoufakis is not a prominent game theorist but you can identify certain strategies that he has been implementing in the negotiations," Eyal Winter, a professor of economics at the University of Leicester told CNBC on Tuesday.

He said the decision to call a referendum in which Greek voters overwhelmingly rejected the bailout terms offered by the country's creditors, is one example of this.

"The referendum and the support of the government's position by the Greek people enables Greece to come back to the group (of creditors) and say you have to give us something more credible than before because the Greek people have now spoken," he said.

More to lose

The resignation of the outspoken Varoufakis, an admirer of game theorist John F Nash whose life was documented in the 2001 film "A Beautiful Mind," could be seen as a deliberate move to strengthen the hand of Greek negotiators in the debt talks, some analysts said.

"This (resignation) gives a clear and loud message to creditors that come to the table and we have a new team of negotiators who will work with you to resolve the issue," Naeem Aslam, chief market analyst at AvaTrade, said in a note on Monday. "This is another perfectly executed move by the game theory specialist-the ex-finance minister."

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According to Winter, just as the Greeks pushed for a referendum, the European creditors could have made a public statement to give them the upper hand in the debt talks.

"These (game theory) strategies can be used by both sides and if one party is using them, it is important for the other party to use it as well," he said. "The Europeans, for instance, could have sent a public message by saying we cannot afford to accept these demands from Greece. Overall the Greeks played much more smartly with much more courage than the Europeans and this is potentially because they have more to lose."

At what price?

While the outcome of the referendum may have strengthened Greece's hand in the short-term, the negotiating style may come at a price in the long-term, other analysts said.

"What seems to be transpiring now is that there is not much that can be given by the European countries without running the danger of hurting their own mandate," Antonio Cabrales, a professor with an expertise in game theory and experimental economics at University College London, told CNBC.

An emergency euro zone summit will be held on Tuesday to resolve the Greek crisis. Proposals that Greece will present do not differ significantly from plans that Greeks rejected in Sunday's referendum, German newspaper Suddeutsche Zeitung reported on Tuesday.

"If there is a deal at all, it would be a similar deal to what was on the table at the start of last week and the outcome would be similar except there's a loss of trust. In the short term, faces may have been saved – especially those of the Greek government, but the long-term consequences are serious and it may potentially be more difficult to reach a deal in the future," Cabrales said.