Nov

25

Game theory has use in the markets certainly in the macro area, but it seems applicable to micro as well. Take for example the consumer confidence numbers recently. Game theory reverse reasoning says that many will jump in the direction of the announcement, as happened. Game theory says that the announcement is malarky and the move in that direction will fade, as it did. The key difference is that one adds a factor for what the others may do in a given situation such as an announcement and adjust probabilities, rather than use a straightforward looking random distribution model. This is a key point. It weighs the future possibilities and then assigns a relative probability to each, and then adjusts the current probabilities based on the relative future values. The random distribution model looks a prior history only to predict. It does not look at the future possibilities and the positions of the players.

Framing the issue to quantify in game theory is key. Use relative values across the variables. Too many variables will lessen the robustness of the model, just as with markets.


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