How useful is it in finance?
I see it’s mentioned in lvl 1’s econ book… does it ever come back into play? could it? should it?
any good game theory books for a beginner? maybe non-textbooks? (i’ve been acquiring too many extracurricular readings that are textbooks lately)
If you want to buy a game theory text book lemme know.
when i was in econ, i thought game theory was so cool…than i did graduate work in the field and found out that the prisoners dilemma is problably all you really have to truly understand, the rest is just games…at least that’s what i found…
Tell that to John Nash. I took it at Columbia, where they apply it to corporate finance, M&A etc. You’ll also learn some useful statistics and probability such as the distribution of the second highest bid in a uniform distribution etc, useful in auctions. Long story short, yes it’s useful and I think will be more important going forward.
the stuff on repeated games is pretty useful when you are investing in a market with a handful of familiar players/brokers. really it’s all just basic logic though.
some useful pdfs from a course: ______________________________________________________________________________
A Course in Game Theory Martin J. Osborne, Ariel Rubinstein
http://www.cs.tau.ac.il/~mansour/course_games/scribe/lecture1.pdf
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Worst-case Equilibria Koutsoupias and Papadimitriou Tight Bounds for Worst-Case Equilibria
A. Czumaj and B. Vocking
http://www.cs.tau.ac.il/~mansour/course_games/scribe/lecture2.pdf
Marios Mavronicolas
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How Bad is Selfish Routing?
Roughgarden and Tardos
http://www.math.tau.ac.il/~mansour/course_games/scribe/lecture3.pdf
______________________________________________________________________________
Game Theory
Owen
Adaptive game playing using multiplicative weights
Freund and Schapire
http://www.math.tau.ac.il/~mansour/course_games/scribe/lecture4.pdf
______________________________________________________________________________
http://www.mathpages.com/home/kmath262/kmath262.htm
Playing large games using simple strategies
Lipton, Markakis and Mehta
Complexity results about Nash Equilibrium
Conitzer and Sandholm
http://www.math.tau.ac.il/~mansour/course_games/scribe/lecture5.pdf
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http://www.cs.tau.ac.il/~mansour/sem-game-02-03/monderer-potential-96.pdf
Monderer and Shapley
On the complexity of pure equilibria
http://www.cs.berkeley.edu/~christos/papers/pure.ps
Fabrikant, Papadimitriou and Talwar
http://www.math.tau.ac.il/~mansour/course_games/scribe/lecture6.pdf
http://www.cs.berkeley.edu/~christos/
______________________________________________________________________________
A Course in Game Theory Martin J. Osborne, Ariel Rubinstein
Parts of Chapters 6 & 8
On Bounded Rationality And Computational Complexity
http://citeseer.ist.psu.edu/486020.html
Papadimitriou and Yannakakis
http://www.math.tau.ac.il/~mansour/course_games/scribe/lecture7.pdf
______________________________________________________________________________
**From External to Internal Regret**Blum and Mansour
http://www.math.tau.ac.il/~mansour/course_games/scribe/lecture8.pdf
______________________________________________________________________________
Convergence Time to Nash Equilibria
Even-Dar, Kesselman &Mansour
Fast Convergance to Selfish Routing
Even-Dar & Mansour
http://www.math.tau.ac.il/~mansour/course_games/scribe/lecture9.pdf
______________________________________________________________________________
M. Jackson
Three Brief proofs of Arrows impossibility results
J. Geanakoplos
A Gibbard-Satterthwaite theorem: a simple proof
J. Benoit
http://www.math.tau.ac.il/~mansour/course_games/scribe/lecture10.pdf
______________________________________________________________________________
11 Combinatorial Auctions
Truth revelation in approximately efficient combinatorial auctions
http://robotics.stanford.edu/~shoham/LOS-JACM(proof).pdf
Lehmann, O’Callaghan & Shoham
**Incentive compatible multi unit combinatorial auctions**Bartal, Gonen & Nisan
http://www.math.tau.ac.il/~mansour/course_games/scribe/lecture11.pdf
Game theory is one of those things that might subtlely influence your thinking and decisions. So, if you read a lot about game theory, you might train yourself to be more mindful of how people will react to your decisions, which could be useful in finance. It’s not one of those things where you regularly say “oh, based on this esoteric concept by this author, I believe I can apply this equation, bla bla bla”. At least from my experience.
^true. it just kind of melds into you thought process without you consciously applying it. really no need to formalize a decision process under a game theoretical construct.
i find as i get older, this is true for just about everything i learned in the CFA program. the most math i do now is division and multiplication.
I think full-fledged graduate level game theory is not relevant to what 99% of people would do in finance, no matter how interesting I find it. I think even an undergraduate level text (I used An Introduction to Game Theory by Osbourne) might even be too hard and abstract for most people beyond the third or so chapter. Some sort of non-technical introduction might be better.
Also, you might get more out of some popular books like:
Thinking Strategically - Dixit
The Strategy of Conflict - Shelling
Micromotives and Macrobehavior - Shelling
Those are the only ones I’ve read since they’re frequently cited as among the best. I’m sure there are others.
the ideas behind it are so simple, but its hard to do in grad school cause its a whole course of math really…i regret taking that course…i should have taken more economic history…
I was about to say what jmh530 added. My take is basically the same but I’ll add that although game theory doesn’t crop up all that often, on those occasions when it does, it’s very useful.
Here’s what I got out of game theory:
Thinking through and analyzing game trees is useful.
A strategy is “a collection of answers/responses you have to each and every information set or state that the world might throw at you.” In reality, there are usually too many possible states of the world to have an optimal action for each one of them, but don’t fool yourself into thinking you have a strategy if you haven’t thought through a wide range of things that you may find yourself facing.
Nash equilibria are the outcomes of combinations strategies that are individually optimal for each player, at least to the extent that neither player has an incentive to modify their own strategy. (I used this to explain to a friend that most men learn to be players because most women are excessively skittish, and most women learn to be skittish because most men are players; neither is optimal when taken together, but given that neither can control the actions of the other, each is a rational response to the world each player faces, so it tends to be a stable equilibrium in relations.)
Sometimes, it is strategic to randomize your decisions.
When there are multiple Nash equilibria, enabling signaling behavior and focal points can help select one that is more optimal than the other (e.g. if prisioners in the prisoner’s dilemma could talk, they would select a different equilibrium than if they can’t). 6) Repeated games can have very different dynamics than one-time or static games because there is the possibility for learned behavior and signaling. 7) The tit-for-tat strategy is an effective answer to the repeated prisoner’s dilemma problem, as long as the game continues a long time. 8) The models can change results dramatically based on tiny changes in the assumptions about behavior or information or preferences (this wasn’t necessarily in the book itself, but a conclusion I (and many others) drew). 9) I need to review cooperative game theory, because it’s got a very different dynamic.
I dig game theory, especially in a geopolitical landscape. Can’t think of a time I’ve really applied it to bottom-up investing though.
The Prisoner’s Dilemma is the most known game in game theory, but there are others:
Chicken is one: http://en.wikipedia.org/wiki/Chicken_(game)
I like Colonel Blotto: http://mindyourdecisions.com/blog/2012/01/24/the-colonel-blotto-game/
And the assurance gaime: http://www.gametheory.net/dictionary/games/AssuranceGame.html
I’m reading a good book right now which applies game theory to finance. It’s called co-opetition. Really good book, it makes you think about pricing, coupons, signals, etc… in new ways.
thanks for all the suggestions and analysis guys
@econgirl, are the econgirl with instructional econ youtube videos?
Cue discussion over whether econgirl is even a girl…
No, I don’t do econ youtube videos.
Yes, I am a girl.
nope