Games People Play

Nobel Games

Game Theory is a theory of human decision making, and one that’s very popular in the dismal science: no less than thirteen of the forty four Nobel Prizes in economics have been awarded to practitioners in the area.  And, indeed, Game Theory is a powerful tool for researchers in many fields, the only problem being that if you give a man a powerful tool they’re likely to want to wave it around and use it on everything, regardless of taste and applicability.

Thus we find that Game Theory and behavioral economics collide in odd ways, which turns out not to surprising as the former is built on the foundations of the standard economic approaches.  Even so, a basic appreciation of the mysterious workings of economic gamers is an essential part of any investor’s kitbag of mental models.

Read Full Post >>

Tax Notes To An Unborn Grandchild

Dear Grandchild,

You’re probably wondering why I've saddled you with huge taxes to pay for debts run up before you were born.  As I write today, the total US debt is about 5 times the average personal income,  about $250,000 per person, and growing, rapidly.

The reason is, fortunately for me, that I won’t be paying the debt off.  Unfortunately for you, you will.  You probably think this is unfair but by the time you figure this out I’ll be dead.  Good luck with that.

Read Full Post >>

Altruism: Signalling Corporate Fitness

Prisoner's Tit-for-Tat

Variations on the Prisoner’s Dilemma game are widespread in financial studies. The idea is that two people are faced with a dilemma: if they both support each other and stay silent they get a short sentence, if they both rat on each other they both go to jail for several years but if one of them spills the beans while the other one doesn’t then the latter is banged up for a long time and the other goes free. On a single shot basis it doesn’t pay to be cooperative.

On the other hand, if the game is repeatedly iterated, the strategy of Tit-for-Tat – start by being cooperative and then simply copy the last action of your opponent turns out to be the best solution, as described by Robert Axelrod. Over long periods of time exploiters get found out and people prepared to cooperate win. This leads to the suggestion that self-interest dictates that we should operate as though we’re altruistic because this is the most successful strategy. So even if we're altuistic we're actually deceiving schemers. Don't you just love the businessman's view of human nature?

Read Full Post >>