Game Theory

[Mr Galt]

The topic has come up several times in books I have read and in discussions I have been a part of. Unfortunately I have little to no knowledge on the topic and would like to learn more about it and it's role in applied mathematics. Does anybody know of a comprehensive book I could buy that would go into detail on the somewhat broad subject?

 

[Nocapszy]

I'm looking forward to this too.

If no one's posted by then, I'll look at a few bookstores around my area tomorrow.

 

[Nocapszy]

This isn't bad but I'm guessing you've already combed the page before you decided you needed a book.

It mentions this book somewhere in there.

 

[ygolo]

von Neumann, J. and Morgenstern, O.: Theory of Games and Economic Behavior (Commemorative Edition).

It's a bit dated, but a classic. I never read the whole things but it was rigourously presented (though I remember it being a Dover publishing book and a lot less expensive, so hopefully its the same one I am thinking of. I can't believe there would be many VonNeumann and Morgenstern books on game theory)

EDIT: Damn! you beat me to it.

 

[Mr Galt]

von Neumann, J. and Morgenstern, O.: Theory of Games and Economic Behavior (Commemorative Edition).

It's a bit dated, but a classic. I never read the whole things but it was rigourously presented (though I remember it being a Dover publishing book and a lot less expensive, so hopefully its the same one I am thinking of. I can't believe there would be many VonNeumann and Morgenstern books on game theory)

EDIT: Damn! you beat me to it.

I saw that book on Amazon. After looking at the title I thought it concentrated heavily on applications to the topic of economics rather than an all encompassing study of the topic. I will look into it. Thank you.

 

[Nocapszy]

Well the book is only the public inception of the idea. Loose bolts were tightened and other various maintenance projects went on throughout the 50s, and presumably it's still honed even now.

 

[nemo]

How much mathematics do you know?

This is the book i have

Game Theory: Analysis of Conflict
by Roger B Myerson

But it requires at least calculus based probability and knowledge of set theory.

 

[ygolo]

I saw that book on Amazon. After looking at the title I thought it concentrated heavily on applications to the topic of economics rather than an all encompassing study of the topic. I will look into it. Thank you.

Oh. Sorry. I got two of my books confused. Thanks for clearing up one of my "bad clusters."

This is the one was thinking of.

The authors are not as prestigious, but I remember liking the presentation.

 

[Hexis]

I thought we where talking about Neil Strauss, but obviously im in the wrong place lol

 

[typo]

If you are looking to get a sense of what game theory is and how it is applied, I suggest "Thinking Strategically" by Dixit and Nalebuff.
Amazon.com: Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life: Avinash K. Dixit,Barry J. Nalebuff: Books

If you want a more academic approach, Gibbons is the introductory standard for economists: Game Theory for Applied Economists
by Robert Gibbons Amazon.com: Game Theory for Applied Economists: Robert Gibbons: Books

If you want a more technical approach by modern day theorists that will unpack game theory for you in all its formalities, then I suggest: Game Theory by Fudenberg and Tirole
Amazon.com: Game Theory: Drew Fudenberg,Jean Tirole: Books

I would not spend too much time with the original work by John von Neumann. My understanding is that von Neumann's work focuses on "non-cooperative games," which are no longer considered that interesting in the field. It would be like trying to learn calculus by going back to Newton's original work. The newer books explain the basics better and provide insight into how game theory's importance and practical applications have evolved.

 

[Colors]

I think I saw a news program on Game Theory. It was very interesting. There were various segments highlighting different parts of game theory (I remember one segment had the employees of two different companies competing to lose weight- but only one company had weekly meetings to try and raise group morale... something like that).

My favorite segment was one in which they approached groups of people (generally 2-3 in a team) in Washington DC to enlist them in a game. The object of the game was to find the other groups that were randomly approached and accept the challenge. They would have to find these people they didn't know anything about- except that these people were also looking for them- within the day- I think they were informed late in the morning and the deadline was about 5-6pm.

Apparently the news program had done a program on game theory before- the same game, but run in New York. Predictably (to me anyway), the groups were able to find each other at the top of the Empire State Building. (Even though New York City is so populous- the idea of meeting someone at the top of the Empire State Building has fairly seeped into people's consciousness from movies like An Affair to Remember and Sleepless in Seattle.)

However, it proved that it was actually more difficult for the groups to find each other in Washington DC (even though it is less populous and the landmarks are closer together). Perhaps a case of too many landmarks, there was lots of running around to various places (White House, Lincoln Monument, etc.)- with pretty much no groups being willing to stay in one place. Spending a lot of time in traffic between the locations reduced their ability to find each other. But they had plenty of cool strategies- like carrying around posters and one group ran into Kinkos to make flyers "ARE YOU LOOKING FOR US?" that set a meet time and place. It was a long time ago, but I believe one or two groups gave up, but three groups did meet up finally finally at the Washington Monument. (Which I predicted, yay! Cause it's tall and visible and has a fairly small "meeting zone".)

 

[Colors]

I searched high and low and couldn't find any full video, but I did find some, and lots of links!

Apparently, the expert they had explaining the topic was Yale professor Barry Nalebuff.

NYC:
Introductory video- (Here's hoping it works!)
Official article here, unofficial blog here.

I prefer the NYC official write-up to the tepid Washington DC one.

Both episodes also involved game theory applied to weight loss. In the first one they had 5 participants. They were made to have pyhotographs taken of them in skimpy bathing suits and had to lose 15 pounds in two months... or else their bathing suit pictures would be shown on TV. In the second one, they had two participants from two companies competing. One group had lots of positive reinforcement- group meetings and team plans. The second group had the bathing suit threat again (this time to be shown on the big screen at a local popular baseball game). (Although not all suceeded, no embarrassing bathing suit pictures were shown, they're not that cruel!):
Official article for second weight loss challenge.
Blog about it (with some comments by some participants)
One of the groups also has this site about it.

 

[Veneti]

Game theory = load of bollocks.

Sorry, but I really do *hate* the speal they provide at colleges and universities esp when it comes to finance (and applications like theory).

If you apply game theory to financial markets then you have that dreaded "chartist" type mentality. Sorry people, but its maths people on the financial markets that b*ggered up the market as it presently stands. (If you don't believe what I am saying then look no further at banks that didn't understand the highly complex and engineered financial products they bought into, and the raft of financial people that make programme trades for large pension funds etc).

If you want to understand competitive stances then you are far better taking pieces of information (analogies) from books like "art of war" understanding the "what if then else" statement in pascal, reading some good strategic management books from MBA courses and so forth... or just talk to a seriously business orientated INTJ... we are contingency theory through and through.

From what I ever saw of game theory at University I could sum it up by playing "noughts and crosses".

Hmmm... I do sound a bit negative this morning...

Oh the memories flood back... "the prisoners delimer"..... grab your coat, its academics talking about economics.

 

[matmos]

This blog is rather good. Presh's Game Theory Tuesdays are very illuminating. He uses game theory to understand a particular economic scenario, in effect putting a different slant on things.

Mind Your Decisions

 

[elfinchilde]

Speaking as a trader myself:

I like Game Theory in general when referring to the financial markets, because we all know, it's a zero sum game. But as Veneti pointed out: i don't believe in wholesale application of it: you'd miss out the infinite variations if you insist on just following Game Theory.

At the end of the day, the financial markets are about three things: greed, hope and fear. If you understand psychology (or Sun Tze's Art of War), you'd do far better on the markets than a manager who simply applies Game Theory without thought that in the chaos of the equity market, it is never mutually exclusive/binary scenarios.

 

[nemo]

If you're interested in the application of game theory, do not get the book I drunkenly recommended, lol. It's written for mathematicians, although it is comprehensive as far as the theory goes.

 

[typo]

Speaking as a trader myself:

I like Game Theory in general when referring to the financial markets, because we all know, it's a zero sum game. But as Veneti pointed out: i don't believe in wholesale application of it: you'd miss out the infinite variations if you insist on just following Game Theory.

At the end of the day, the financial markets are about three things: greed, hope and fear. If you understand psychology (or Sun Tze's Art of War), you'd do far better on the markets than a manager who simply applies Game Theory without thought that in the chaos of the equity market, it is never mutually exclusive/binary scenarios.

The financial markets are definitely not zero sum games, in that one trader's gain is not offset by another trader's loss. Viewing financial markets as a zero-sum game implies zero economic growth, with gains and losses determined only by changes in price. A more accurate view is that the gains in the market are driven by the assets involved creating more value than they were in the past. The economic pie tends to increase and the gains outweigh the losses.

 

[ygolo]

The financial markets are definitely not zero sum games, in that one trader's gain is not offset by another trader's loss. Viewing financial markets as a zero-sum game implies zero economic growth, with gains and losses determined only by changes in price. A more accurate view is that the gains in the market are driven by the assets involved creating more value than they were in the past. The economic pie tends to increase and the gains outweigh the losses.

However. When you adjust for real growth in earnings and dividends...

IDK. This is something that fascinates me. I have been studying derivatives for a while, but have been too chicken to use strategies I've virtual traded using real money.

With options, there is a concept of a box. That seems like a zero sum game between you and the market maker.

For m there, it seems like most derivative strategies are zero sum games with multiple players.

 

[LostInNerSpace]

If you apply game theory to financial markets then you have that dreaded "chartist" type mentality. Sorry people, but its maths people on the financial markets that b*ggered up the market as it presently stands. (If you don't believe what I am saying then look no further at banks that didn't understand the highly complex and engineered financial products they bought into, and the raft of financial people that make programme trades for large pension funds etc).

This is not completely true. The real problem was systemic failure in the financial system. It was apples and oranges syndrome. What happened was the investment banks were taking these subprime mortgages and packaging them with high grade mortgages in such a way that the credit rating agencies would rate the new CDO (collatoralized debt obligations) as AAA grade debt. The problem was that investors were seeing this AAA graded debt selling very cheap and trusting that the credit rating agencies were doing their job and properly rating the debt. That's the whole reason they exist in the first place. The rating system however was not designed to rate CDOs. This is the apples to oranges syndrome. Psychologists often say the only thing that tops fear is greed .

There are people who knew the subprime melt down was coming. Read some of John Mauldin's archived newsletters. You'll see he has been beating the subprime drums for quite a while. A few astute hedge fund managers made billions buying up credit default swaps, which are like options on pools of mortgage backed securities. Additionally if you look at Goldman Sachs, you'll see that they lost some money, but much, much less than other banks because they understand risk so well. Vikram Pandit brings that understanding of risk to Citi.

This is why I spend so much time myself studing risk in the financial markets.

 

[elfinchilde]

The financial markets are definitely not zero sum games, in that one trader's gain is not offset by another trader's loss. Viewing financial markets as a zero-sum game implies zero economic growth, with gains and losses determined only by changes in price. A more accurate view is that the gains in the market are driven by the assets involved creating more value than they were in the past. The economic pie tends to increase and the gains outweigh the losses.

hey typo,

yea, agree with you. should have clarified my view: when i mean generally, i meant that in the exact trade you are doing, one either loses, or gains (let's leave out the break-even scenario for now). So in that very superficial sense, it is zero sum.

but in the view of the entire portfolio: just because you lose one trade, doesn't mean the entire portfolio goes down the drain, if it's diversified. Plus, there's losing little, losing a fair sum, and losing a large sum. Same for winning. And so, it cannot be a simplistic binary situation of just win or lose. Years of winnings may be wiped out by one gigantic loss, or variables: Bear Sterns is the perfect example.

I think the economic pie increases, but so do the number of participants. It's like MLM. Only the ones at the top make the most, in the end. the aim of the game is to ensure you're not the lowest in the hierarchy of feeders.

edit: and one more thing: when you actually enter the markets, you can throw all your books out of the window. Preconceived notions are some of the best killers of new traders. Only one rule: follow the trend. Even experienced traders die, when they cling to concepts and refuse to acknowledge the reality of the trend in front of them.