“Scissors , Paper , Stone “ : Can Game Make you a Better Investor ?



Game theory has been studied since the 1940s, it has only recently been applied to the world of finance. Game theory champions garnered the 1994 Nobel Prize in Economics, and today this theory is used to analyze everything from the baseball strike to spectrum and casino licenses’ auctions.

 Increasingly, game theory is also making its ways to behavioral finance for better understanding and decision making in financial world.

According to Financial Post , “ Game Theory is a powerful tool for predicting outcomes of a group of interacting firms where an action of a single firm directly affects the payoff of other participating players. 


Given that each firm functions as part of a complex web of interactions, any business decision or action taken by a firm impacts multiple entities that interact with or within that firm, and vice versa. Said another way, each decision maker is a player in the game of business.  Therefore, when making a decision or choosing a strategy firms must take into account the potential choices and payoffs of others, keeping in mind that while making their choices, other players are likely to think about and take into account your strategy as well.  This understanding – quantified through payoff calculations –  enables a company to formulate their optimal strategy.

Game Theory is ideal for strategic situations where competitive or individual behaviors can be modeled.   These situations include:  auctions (e.g., sealed project bids), bargaining activities (e.g., union vs management, pricing buy-back and revenue-sharing negotiations), product decisions (e.g., entry or exit markets), principal-agent decisions (e.g., compensation negotiations, supplier incentives) and supply chain design (e.g., capacity management, build vs out source decisions).

Game Theory principles are leveraged through the use of strategy games.  These games are well-defined mathematical scenarios that encompass a set of players (individuals or firms), a set of strategies available to those players, and a payoff specification for each combination of strategies. One simple and well-known example of a strategy game, familiar to first year psychology students, is the four quadrant Prisoner’s Dilemma. “


These are two of the books on game theory which I would recommend for further reading from Thomas C Schelling, an American economist and professor of foreign policy, national security, nuclear strategy, and arms control at the School of Public Policy at University of Maryland, College Park. He was awarded the 2005 Nobel Memorial Prize in Economic Sciences (shared with Robert Aumann) for "having enhanced our understanding of conflict and cooperation through game-theory analysis".











Concept explained : Game Theory by Investopedia


Game theory, the study of strategic decision-making, brings together disparate disciplines such as mathematics, psychology and philosophy. Game theory was invented by John von Neumann and Oskar Morgenstern in 1944 and has come a long way since then. The importance of game theory to modern analysis and decision-making can be gauged by the fact that since 1970, as many as 12 leading economists and scientists have been awarded the Nobel Prize in Economic Sciences for their contributions to game theory.

Game theory is applied in a number of fields including business, finance, economics, political science and psychology. Understanding game theory strategies – both the popular ones and some of the relatively lesser-known stratagems – is important to enhance one’s reasoning and decision-making skills in a complex world.



Prisoner’s Dilemma – In a Nutshell

One of the most popular and basic game theory strategies is Prisoner's Dilemma. This concept explores the decision-making strategy taken by two individuals who, by acting in their own individual best interest, end up with worse outcomes than if they had cooperated with each other in the first place.

In the Prisoner’s Dilemma, two suspects who have been apprehended for a crime are held in separate rooms and cannot communicate with each other. The prosecutor informs each of them individually that if he (call him Suspect 1) confesses and testifies against the other, he can go free, but if he does not cooperate and Suspect 2 does, Suspect 1 will be sentenced to three years in prison. If both confess, they will get a two-year sentence, and if neither confesses, they will be sentenced to one year in prison.


While cooperation is the best strategy for the two suspects, when confronted with such a dilemma, research shows that most rational people prefer to confess and testify against the other person rather than stay silent and take the chance that the other party confesses.



Can Games Make You A Better Investor?



Below is the LINK from Investopedia which may give you some clue about this :



According to writer ( Stephen D Simpsons ) : “Games don't always get their due. Psychologists and neuroscientists have long known that games, far from being trivial wastes of time, can actively reshape the human brain and improve a variety of cognitive and emotional functions. As investing is a great example of an activity that draws on a wide range of mental and emotional skills, it is worth exploring how to improve this skill set.


Investing is more than just memorizing ratios, accounting rules or gimmicky screening formulas. It requires a variety of mental attributes and abilities that gaming can enhance. The more practice investors have in skills such as probability, prudent risk-taking, strategic thinking and asset management, the better their investing outcomes ought to be. Conveniently enough, these all seem to be skills that can be honed through games.”


How about Financial Card Game in Local Context ?  



                          WongaMania : Banana Economy















This is an interesting game related to financial world developed by local game designer “ Xeo Lye and his team “ .


I ever played the game with some of my friends ( fellow financial bloggers ) and found that it’s quite interesting as it could increase our financial literacy while the game move from one business cycle to another and the impact of each asset price ( eg property , bonds, share , cash ) in different economic environment . In anticipating the economic cycles , players will need to move or accumulate  different asset class as to avoid being penalized and loss the game eventually .



You may find more detail and write up on the game on below LINK :





 
Let’s start playing the Game ( Stock Market Mind Games ) .




Cheers !











“Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard.”  Warren Buffett








< This is not an advertorial post for Wongamania , please explore the game by yourself if you find it interesting >


Comments

  1. Investing is a Game of Strategies. We need to think and think and revising our strategies as the Game keeps changing and evolving over market and economic cycles. It is never a fixed Game with rules already pre-defined.

    ReplyDelete
  2. Hi Uncle CW8888,
    Yes , you are right , it is not a easy game and one need to be in the market for multiple cycles only to understand the characteristic of the market ...as what Charles Ellis in his famous book called it ,, "a loser's game " , one will need to ensure how to avoid mistake or greedy to win the market ,,, not to be like winner's game (i.e professional game - Golf ) that require super skill on every shoot ... experience and learn from the market count ,,,, not the "smartest " ..
    Cheers ! :)

    ReplyDelete

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