Nooruladha’s Weblog

Notes from Satyam Game Theory Seminar.
May 21, 2008, 8:02 am
Filed under: Uncategorized

About a month ago, attended this webinar regarding game theory, and its application in every day life, as well as the stock market. Below is the excerpt of the class. Hopefully it is useful for me in the future as a reminder.

Game theory:

1. Simultaneous game is used to analyze situations, for example, stock market buy-out. For example, why certain people buy at certain price, and why they make that decision.

Nash equilibirium is a situation where an individual player wont be able to profit unless other player make certain action/decision as well that prove to be profitable for both. This situation only exist if both knows/suspect the decision they are going to make. It may/may not exist in a situation.

Zero sum is a situation where the combined action of players resulting in one profit while other loses. I would say sometimes the market reacts that way. There is surely some losers in the game, as there is only a certain finite amount of monies out there.

Prisoner’s dilemma (two person action) is a propose thought experiment where individual self-interest action will result in bad result, while collective mutual action result in both average result. The best solution is inaction by both parties, but it will never happen in real life. This is not related ( i think) to the market.

2. Sequential game is a situation where a player react to other action by other player. E.g. Reduction of price by competing companies. I think this applies for those non-fundamental analysts.

First mover advantage is advantage for first do-er for a particular action. Applied to buyer of share before price goes up to news. it means, if we get the first big shares portion, have better advantage for those who enter the market late  (like in a stock market).

Decision making under uncertainty is an ability to make decision under probability based upon current/future scenario. This is not fundamental method, but obviously best practice when a certain second board counter going to be listed in the first board, by some action. THe probability of such activity can be attributed and given percentages to its actual completion, based upon history or other decision procedure.

3. Probability can be divided into mainly 2:

a. frequentist – based upon frequency, which is mainly historical data
b. bayesian – based upon mixture of frequency,experience and data, and weightage is given to each factor to come up with a good probability factor.

Scenario-based decision, and applying probability and weight to each scenario, in order to qualify the situation, what is the likely outcome.

4. Allais paradox is how an additional of independent effect (such as bad news, bad quarterly results etc) can influence a player’s behavior.
The effect of this paradox is that it means the “so-called” rationality of game theory can be debunked.

5. Framing effect is very real in the stock market. A certain news / fact can means diferent to another person – an effect if we present the fact differently. The fact is same, but the way it is presented is different.


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