Economic Questions for Investors
Alan, Ben and Max were discussed about trading rules on the Stock Poll Group. I thought it was very interesting. I have been thinking about this all the time. Here were some of my recent thoughts as first appeared on the stock poll group on February 3, 2006.
This year the Nobel Economics prices went to two strategists: Schelling & Aumann. Their findings are very relevant to stock trading, at least in my mind.
Schelling showed that a party can strengthen its position by overtly worsening its own options, that the capability to retaliate can be more useful than the ability to resist an attack, and that uncertain retaliation is more credible and more efficient than certain retaliation.
These insights have proven to be of great relevance for conflict resolution and efforts to avoid war. His theory guided the Cold War strategies for the United States. Actually his theory was a top military secret for almost 20 years before the Cold War ended.
His idea is about strategic commitments. That is if one side is committed to retaliate at all costs, then the other side may give up attacks. Wars can be avoided.
One can apply Schelling's theory in stock trading. The result is that we should not buy a stock in the first place if we can not commit to buy it when its price is falling. Buying at averaging down has a theoretical basis.
Now the danger is that we do not know if we are right about this commitment in the first place. So trading stocks is a confidence game.
Aumann showed the difference between games played only once and games played for infinite times. Nash (those who have seen the Beautiful Minds may know who is, too) have shown that the game (play only once) can an equilibrium solution. Now Aumann have proven that the Nash’s equilibrium may not work for the infinite games. In infinite games, a set of feasible solutions may be enough for winning an infinite game (the same game played again and again).
Aumann Theory is even better related to the stock trading. Trading stocks is a game. In order to win the game for a long time (many trades), the optimal trading strategy for winning one trade is not enough. The best strategy to win this kind of infinite game is to have a feasible solution at each trade. Only this set of feasible solution can win the trading game for years to come.
I try to derive some insights from the Nobel laureates, especially the economics laureates. If you have read my writing till here, thanks for your interests.
This year the Nobel Economics prices went to two strategists: Schelling & Aumann. Their findings are very relevant to stock trading, at least in my mind.
Schelling showed that a party can strengthen its position by overtly worsening its own options, that the capability to retaliate can be more useful than the ability to resist an attack, and that uncertain retaliation is more credible and more efficient than certain retaliation.
These insights have proven to be of great relevance for conflict resolution and efforts to avoid war. His theory guided the Cold War strategies for the United States. Actually his theory was a top military secret for almost 20 years before the Cold War ended.
His idea is about strategic commitments. That is if one side is committed to retaliate at all costs, then the other side may give up attacks. Wars can be avoided.
One can apply Schelling's theory in stock trading. The result is that we should not buy a stock in the first place if we can not commit to buy it when its price is falling. Buying at averaging down has a theoretical basis.
Now the danger is that we do not know if we are right about this commitment in the first place. So trading stocks is a confidence game.
Aumann showed the difference between games played only once and games played for infinite times. Nash (those who have seen the Beautiful Minds may know who is, too) have shown that the game (play only once) can an equilibrium solution. Now Aumann have proven that the Nash’s equilibrium may not work for the infinite games. In infinite games, a set of feasible solutions may be enough for winning an infinite game (the same game played again and again).
Aumann Theory is even better related to the stock trading. Trading stocks is a game. In order to win the game for a long time (many trades), the optimal trading strategy for winning one trade is not enough. The best strategy to win this kind of infinite game is to have a feasible solution at each trade. Only this set of feasible solution can win the trading game for years to come.
I try to derive some insights from the Nobel laureates, especially the economics laureates. If you have read my writing till here, thanks for your interests.
posted by Unknown at 9:40 PM
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