Jan

22

Ken Binmore: How to Play The Game

By Teresa | Filed Under Brain Candy | Start a Discussion 

We’ve discussed looking at price as a function of Justin Mamis’ Sentiment Cycle. In a nutshell, his description of the pitfalls of investing dovetails with landmark findings of behavioral finance.

Those who want to go that extra mile in trading or poker should explore the world of game theory. Check out Game Theory: A Very Short Introduction [Sample Chapter PDF] by Ken Binmore, the professor that devised the most diabolical auction ever held, raking in $22 billion POUNDS for the British government in the 3G telecom auction in 2000:

22-gametheory.jpgGames are everywhere: Drivers manoeuvring in heavy traffic are playing a driving game. Bargain hunters bidding on eBay are playing an auctioning game. A firm negotiating next year’s wage is playing a bargaining game. The opposing candidates in an election are playing a political game. The supermarket’s price for corn flakes is decided by playing an economic game.

Game theory is about how to play such games in a rational way. Even when the players have not thought everything out in advance, game theory often works for the same reason that mindless animals sometimes end up behaving very cleverly: evolutionary forces eliminate irrational play because it is unfit.

Game theory has seen spectacular successes in evolutionary biology and economics, and is beginning to revolutionize other disciplines from psychology to political science. This Very Short Introduction introduces the fascinating world of game theory, showing how it can be understood without mathematical equations, and revealing that everything from how to play poker optimally to the sex ratio among bees can be understood by anyone willing to think seriously about the problem.

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