Uhh, that is a flaw, Step 3 and 4 in his list should never happen. And no they don't happen all the time in the real world. In the real world people remeber what happened yesterday or last year (i.e. what happned in the previous turns in game terms).
Example:
USA to Britain: Saddam Hussein is evil, I'll give you $1 Billion dollars to bomb him back into the stone age.
Britain to USA: Sounds good, time for war!
Britain to USA: Hmmm, these Iraqi's are tough, we could use some help! We'll give you $10 Billion to help us in our war against the evil Sadam Hussein!
USA to Britain: War profiteering is fun! We accept your generous offer! Thank goodness you guys forgot we're the ones who dragged you into this sorry war in the first place.
(Edit: I had fun with this so I thought I'd continue this example to show how it's possible to exploit the AI further. All references to real countries are for fictional and humourous purposes only, so please no one take offense!
)
Britain to USA: You know, now that we are both at war, we could really use some help against the evil Sadam Hussein. How come you aren't sending any troops to help?
USA to Britain: All our forces are needed for homeland security and our military deployments are none of your concern.
Britain to USA: But we could really use some help!
USA to Britain: Well, we could sell you this (level 1) medic we just hired for $100.
Britain to USA: Great, how much?
USA to Britain: $100,000.