Trump, Game Theory, and the Collapse of Credible Threats

When I first framed Donald Trump through the lens of game theory, I argued that he oscillated between two incompatible strategies: the bully who never concedes and the bluffer who swerves at the last minute. Recent events, from the awkward theatrics at the World Economic Forum in Davos to Mark Carney’s pointed defence of institutional stability, to the political retreat over immigration enforcement in Minnesota, and now the Supreme Court of the United States’ decision clipping the wings of Trump’s tariff overreach — which Rahm Emanuel the former White House Chief of Staff, compared to a “circuit breaker” in the Trump’s recent saga — have not merely illustrated the argument; they have sharpened it.

Trump’s method is extreme anchoring. Start with maximal demands, refuse to blink, and force counterparts to negotiate in your shadow. In bargaining theory, this can work, if the threat is credible. Charles de Gaulle wielded intransigence effectively because his “no” meant no. Trump’s “never” often means “until the next recalibration.”

At Davos, the script was familiar: allies scolded, trade partners warned, global elites chastised. But the room did not tremble. It listened. The difference between Trump 1.0 and now is that the world has updated its priors. In repeated games, players learn patterns. And Trump’s pattern is now visible.

Game theory’s prisoner’s dilemma teaches that an “always defect” strategy may extract short-term gains from naïve cooperators. But once others recognise the move, they retaliate or disengage. Cooperation collapses; and so does leverage.

Mark Carney’s recent speeches underscored the contrast. Where Trump thrives on volatility, Carney stresses institutional predictability. Markets operate on expectations; expectations require credible constraints. When tariffs are announced as permanent weapons one week and softened the next, the discount rate on presidential threats rises. Investors and governments begin to price in reversal.

The Minnesota ICE episode reflects the same dynamic domestically. In the classic “game of chicken” two drivers race towards each other, testing who will "swerve" (concede) first to avoid disaster. The first to yield is deemed the "chicken" or coward, while the one who stays the course wins. Trump revs the engine masterfully. But repeated last-minute course corrections, whether political, legal, or economic, change expectations. Governors resist longer. Bureaucracies stall. Courts intervene. They assume escalation will eventually be filtered through institutional guardrails.

And often, it is as it seems so far.

The Supreme Court’s decision constraining aspects of Trump’s tariff authority is the most consequential example. Tariffs were central to his coercive toolkit; unilateral, dramatic, symbolic of executive muscle. Judicial intervention inserts a third player into what Trump prefers to frame as bilateral contests. If trading partners know tariff escalation faces legal barriers, the credibility of escalation falls.

Game theory hinges not just on preferences but on constraints. A threat constrained is a threat discounted.

This reinforces what I earlier called the bluffer’s paradox. Trump tries to play two roles simultaneously:

• The “madman,” cultivating unpredictability to amplify fear, which is a tactic associated with Richard Nixon and theorized by Thomas Schelling.
• The “chicken,” escalating rhetorically before swerving at the brink.

Over time, these roles cancel each other out. The madman strategy works only if catastrophe appears plausible. The chicken strategy works only if opponents fear collision. But repeated observation of retreat, whether via market pressure, political recalibration, or judicial limits, erodes the plausibility of catastrophe. Unpredictability stops being terrifying and becomes merely noisy.

Foreign governments have adapted accordingly. China absorbed earlier tariff shocks and diversified. Europe responds procedurally rather than emotionally. India seems to be hedging pragmatically. Russia assumes oscillation as baseline. The common strategy is patience: outlast the cycle.

In repeated games, patience defeats volatility.

Domestically, markets display the same adaptation. They spike on announcements and settle on institutional review. Congressional actors hedge rather than panic. The base may interpret reversals as tactical brilliance; markets interpret them as instability. Either way, the deterrent value of the original threat diminishes.

None of this means Trump is irrelevant. He remains formidable at agenda-setting. He can dominate headlines within hours. But agenda-setting is not equivalent to durable bargaining leverage. Performance can energise supporters and frame narratives, yet performance without irreversible commitment rarely alters structural outcomes.

De Gaulle’s intransigence elevated France because it was anchored in a long horizon and backed by credible institutional alignment. Trump’s rigidity often collides with the American system’s deliberate diffusion of power; courts review, states resist, Congress recalibrates and markets react. The very constitutional design that preserves democracy weakens unilateral brinkmanship.

Game theory suggests that credible commitment often requires tying one’s hands i.e., removing the option to retreat. The US system seems making such self-binding difficult. The result is spectacle followed by filtration — loud escalation, institutional moderation, rhetorical victory claims.

The equilibrium, then, is not collapse nor domination. It is normalisation of volatility. Allies no longer rush to concede at the first tariff threat. Domestic actors do not immediately yield to enforcement ultimatums. Markets price in drama and wait for judicial clarity; and those who can afford to make money through this volatility continue to do so.

Trump’s strategy once thrived on shock. Now unpredictability is expected on a different scale. And expected unpredictability loses edge.

The events at Davos, Carney’s institutional rebuttal, Minnesota’s partial retreat, and the Supreme Court’s tariff constraint all point to the same conclusion: the bully-chicken oscillation is transparent. Transparency of bluff is fatal in strategic interaction.

The shark is still thrashing. But the pool has visible walls — legal, federal, international. Everyone sees them.

The real question for Beijing, Brussels, New Delhi and for American voters is no longer whether Trump will escalate. It is whether escalation, stripped of credible commitment, still changes the game.

So far, it changes the headlines more than the equilibrium.