Behavioral finance FAQ / Glossary (Game)

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Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
i: incidental

Game playing

02/6i - 05/8i + see boredom,
game theory, gambl

Is life a form of game?
Or do you take it as such?

Should expertise be boring?

Or does it have some common blood with fun and play?


Market plays

In economics and finance, the presence of "challenges" and
"competitors" creates some playing spirit.

This article is about playing, not gambling, which is another article's topic,
but of course there are some common traits.

This gaming tendency is even more salient in asset markets.

One of the key motivations of many investors and traders could be the
urge to play (maybe jusr because life is seen as boring (see boredom).


It might no
t seem politically correct to commit the grocery wallet to fun-
seeking, and bring havoc to the family. But darling, why not the booze
or chocolate piggy bank?

OK, there are other, more tedious, incentives for investing.

Like improving one's wealth in the long term to prepare one's retirement.

Why do people come to play in the market arena?

Constructive or destructive playing?

Nothing is more serious than fun!


Aside trying to make money and earn their bread (or truffles), "market players"
might see game playing with market instruments as a way to either:

Fight boredom (see that  word) and dullness and have fun. Interactive fun
    what is more. Not just like watching TV series.

Test their skill (and try to improve it) ...and their luck (nothing much to do
    about it ;-)),

Prove some superiority to themselves or to others,

This challenge-seeking attitude might be linked not only
to a satisfaction of the self, but also to a fighting
instinct, ingrained in life itself.

Spermatozoa are competing, if not gaming ;-)

Sociological parenthesis:
     the pros and cons of game playing

Fun is more than just fun, it is a kind of teaching / learning.

Like all teaching, it makes us often smart
...and sometimes idiotic.

The pros:

Game playing is a fundamental human activity, and a respectable
and useful one:

It plays (sorry for repeating the verb) an important
   economic role.

Many inventions comes from game-making, toy-making, fun,
pastime activities.

It boost various human capabilities:

Creativity, observation, reasoning,

Tactical aptitudes, as they bring a challenge,

More largely, decision making aptitudes.

And also, discipline.


Some games have specific effects:

Some develop muscles (well, financial games are not among
    such sports ;-)),

others contribute to learning and analyzing, or to

develop self-control

Some give a sense of strategy, or prepare to social integration.

Some might even be a mild alternative to warfare,

this was why the Olympic games were invented by the way.

Videogames might have such a sobering effect, except on

some feeble minds of course.

The cons:

On the other hand, some excesses (overplaying?) are to avoid.
Some dangers exist
:

In the worst cases, a destructive dependence

/ addiction, that overrides all other life goals (and the
sense of risk)

But also, in a milder way, mind distraction and loss of time, at the

detriment of other activities and "duties" that could
be more crucial,

Getting blinded and carried away by the game and 

forgetting elementary precautions (although gaming can
also
enhance experience and self-control as seen above)

Side-taking leading to enmities and exactions.


Some kinds of gambling (see that word) fits also the game playing
description  but its destructive aspect is often more
present.

It is not always the right moment to play, better sometimes
stay on the sideline and accept dullness.

Is game playing compatible with investing?

More generally is it compatible with
expertise-building in decision-making?
Playing with real chips vs. playing with beans.


Investing is sometimes considered as a form of game playing.

But the analogy cannot go too far, as a bit more discipline is needed

to stay and survive in the investing game.

Here are some convergences:

Game playing might not be the best motivation for investing

...but it makes life interesting.


The same that good game playing is not just fun

as discipline, self-control is even more
involved in good investment
(see willpower)

"investment should be dull", it is often said (*).


Also investment is a challenge toward a goal,

like some games.

(*) No, it doesn't mean "fun should be dull", some sort of "logical fallacy"
     (see that phrase).

I just said that discipline is a basis for good investing, even at the price
of losing some of the fun by accepting some patience and dullness.

Another aspect is that, metaphorically, tactical decisions in business, wars,
politics, when there is a limited number of true competitors, can in some ways
be assimilated to a game (see game theory) and a confrontation of wits.

 

Dates of related message(s) in the
Behavioral-Finance group
(*):

Year/month, d: developed / discussed,
i: incidental

Game theory

00/5i,6i,7i,8i,12i - 01/1i,11i,12i
- 02/5i,11i
+ see game + bfdef3

Fight? Cheat? Or treat?

The game theory (i.e. the prisoner dilemma) is a field of research that tries to find
methods
to optimize decision-making when facing other (independent)
players
.

It proposes those methods as a set of rational criteria to reach some goals
and / or what is deemed to be their common interest.

From chessboard to decision mathematics

Putting the other players into the equation.

The game theory has some relation with strategy 
(war strategy, diplomatic strategy, political strategy, business strategy,
negotiation, among others).


The ancestors of game theory are found in old "strategic games" (chess,
game of go, card games...).

The game theory has generated many logical / mathematical decisions
models
that can be categorized between the three main types of games:

"Negative sum"
    games

Even the winner can lose (see winner's curse /
Pyrrhic victory).

"Zero-sum"
    games

 

They often result in competitive games:
each player tries to grab the biggest share of a
limited resource

"Positive sum"
    games

They often take the form of co-operative games:
each player tries to make a bigger cake for the
community by combining their strengths.

Does game theory apply to market behavior?

In the market field, a player might feel in sync with
the others.

But he should not forget that actually he faces them alone.


The game theory has some applications in strategic thinking and decision
making
, some of them in economics and finance.

Also, like experimental economics (see that phrase), and obviously,
behavioral finance, it might help to understand human decision-
making and behaviors
. Trying to identify what could be optimum
behaviors (however theoretical and far from real life those findings
might be) is a comparison basis for this understanding.

But the game theory can be applied only in a limited degree

  to economic and market analysis as :

It applies essentially to situations with a limited number of
    players
.

You know, like poker or bridge or ...dating.

It relates therefore to microeconomics (for example the behavior of
oligopolies)and to occasional financial deals such as takeover fights.

Thus, it has only a small relationship with what happens
everyday in large free markets
.

Except maybe when a few massive investor categories face each
others (big hands v. small investors, fundamentalists v. technicalists...).


Its findings often differ from what happens in reality.

In the real world, players do not choose always the most
rational tactics or what is considered their own
interest.

Some strange things might happen, when nearly everybody wins by
playing in the same way (in the last stage of a market bubble) ...until
nearly everybody loses (when the crash takes place and then persists).


A subfield of behavioral economics, based on experimental
economics
(see that phrase) and called "behavioral game theory",
studies how actual behaviors deviate from the tentative rationality of
the game theory.

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