AI and Geoeconomics

Thomas C. Schelling Thomas C. Schelling (1921–2016) was an American economist and professor known for his ground-breaking work on game theory and its application to conflict, cooperation, and international security. He was awarded the Nobel Memorial Prize in Economic Sciences in 2005 for “having enhanced our understanding of conflict and cooperation through game-theory analysis.” Schelling’s influential books, particularly “The Strategy of Conflict” (1960) and “Micromotives and Macrobehavior” (1978), introduced key concepts such as focal points, credible commitments, and the “tipping point” phenomenon, profoundly shaping fields like international relations, nuclear strategy, and even social dynamics. Theory of Conflict Thomas Schelling in “Theory of Conflict” wrote: TACIT COORDINATION (COMMON INTERESTS) When a man loses his wife in a department store without any prior understanding on where to meet if they get separated, the chances are good that they will find each other. It is likely...

Méphistophélès in Faust’s study Eugène Delacroix Introducing  “Doubts and Variability” by Rhys Bidder (Federal Reserve Bank of San Francisco) and Matthew E. Smith (Federal Reserve Board). Working Paper (First Draft Sept 4, 2010 – current version Aug 4, 2011). One of the most enduring puzzles in the macrofinance literature is the equity premium puzzle. A manifestation of this puzzle is the difficulty of designing a model that simultaneously generates a substantial market price of risk and a low risk free rate, while also respecting stylized facts regarding consumption dynamics, as discussed by Hansen and Singleton (1982) and Mehra and Prescott (1985). In this paper Bidder and Smith show that the interaction of stochastic volatility in consumption with a fear of model misspecification can bring new pieces to the puzzle. The agent in their heteroskedastic (with time-varying variance) endowment economy does not fully trust the joint conditional distribution of the...