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"Finance has always been complex. More precisely it has always been opaque, and complexity is a means of rationalizing opacity in societies that pretend to transparency. Opacity is absolutely essential to modern finance. It is a feature not a bug until we radically change the way we mobilize economic risk-bearing. The core purpose of status quo finance is to coax people into accepting risks that they would not, if fully informed, consent to bear."
"Game theory is the standard tool used to model strategic interactions in evolutionary biology and social science. Traditional game theory studies the equilibria of simple games. But is traditional game theory applicable if the game is complicated, and if not, what is? "
"We consider a network of coupled agents playing the Prisoner's Dilemma game, in which players are allowed to pick a strategy in the interval [0,1], with 0 corresponding to defection, 1 to cooperation, and intermediate values representing mixed strategies in which each player may act as a cooperator or a defector over a large number of interactions with a certain probability. Our model is payoff-driven, i.e., we assume that the level of accumulated payoff at each node is a relevant parameter in the selection of strategies. Also, we consider that each player chooses his/her strategy in a context of limited information. We present a deterministic nonlinear model for the evolution of strategies. We show that the final strategies depend on the network structure and on the choice of the parameters of the game. We find that polarized strategies (pure cooperator/defector states) typically emerge when (i) the network connections are sparse, (ii) the network degree distribution is heterogeneous, (iii) the network is assortative, and surprisingly, (iv) the benefit of cooperation is high. "
"We study a networked version of the minority game in which agents can choose to follow the choices made by a neighbouring agent in a social network. We show that for a wide variety of networks a leadership structure always emerges, with most agents following the choice made by a few agents. We find a suitable parameterisation which highlights the universal aspects of the behaviour and which also indicates where results depend on the type of social network. "
"Many real-life social dilemmas contain third parties who cannot make decisions in the dilemma, but are affected by its outcome (receive externalities) nonetheless. Dilemmas with identical payoffs for decision-making actors may greatly vary in their externalities for third parties. If actors value the welfare of thirds, externalities will affect actors’ decisions. We test behavioral predictions from three leading ideas on social preferences (altruism, inequality aversion, competition) in two studies that employ four one-shot, 2-person prisoner’s dilemmas (PDs) that differ only in their externalities. The PDs respectively include a third party that (i) is indifferent, (ii) prefers defection, (iii) prefers cooperation. Our results show that while aggregate behavior is not affected by externalities, individual behavior is. Compared to a PD without externalities, prosocial individuals cooperate more when a third benefits from cooperation, but do not defect more when a third benefits from defection. The opposite pattern is found for competitive individuals. "
Nomic is a game created in 1982 by philosopher Peter Suber in which the rules of the game include mechanisms for the players to change those rules, usually beginning through a system of democratic voting.
THEORY OF GAMES AND ECONOMIC MISBEHAVIOR
By George Dyson
An Edge Original Essay
in list: Economic Crisis
The determinacy of infinite games with eventual perfect monitoring in the theory bag lunch a couple of weeks ago, and I promised some open problems, which I didn’t deliver yet. Well, we have a blog now, so here goes:
I consider in this paper an infinite general two-player zero-sum game with imperfect monitoring. These games are generalizations of Gale-Stewart games to the case in which players don’t observe opponent’s past actions immediately after they are played.
Long essay on banking and capital intermediation.
in list: Economic Crisis
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So how does the financial sector seem to offer risk-free assets against risky projects? I think "constructive ambiguity" is the right phrase. The government provides subsidies in the form of literally priceless deposit and liquidity backstops, but those are explicitly limited. Banks work to diligently to increase both the level of insurance and degree to which assets are perceived to be insured by becoming so large that social costs of a bank default on even notionally risky assets are thought to exceed the costs to government of paying out on insurance policies to which it never agreed. Even a very careful observer cannot tell a priori whether many assets offered are genuinely riskless or not, that is to what degree the risk-free status of bank assets is due to subsidy, and to what degree to subterfuge. But there is an ingenious tinkerbell aspect to the risk status of bank assets: If, with a bit of subterfuge, risky assets can be sold as riskless assets, then the social costs of default rise, since asset holders will not have privately managed the risk that the asset might fail. The increase in social costs created by a mischaracterization of a risky asset as riskless, however, alters the likelihood that an asset will be de facto insured. There is a game theoretic equilibrium, that works to the advantage of intermediaries and their customers on both sides of the funding stream, whereby banks offer assets in large quantities as though they are risk-free, and investors accept and treat those assets as risk-free, and by believing together in what is formally not true, they create costs to the sovereign so large if it is not true that the sovereign makes it true. This is an equilibrium, a predictable outcome, not an aberration. And it does happen all the time.
"Life doesn't always hand you fair games, and the best we can do for each other is play them positive-sum." illustrated with a bit of history from game theory.
"The cognitive hierarchy theory finds that people only do a few steps of this kind of iterated thinking," he explains. "Usually, it's just one step: I act as if others are unpredictable. But sometimes it's two steps: I act as if others think *I* am unpredictable. You can think of the number of steps a person takes as their strategic IQ. A higher strategic IQ means you are outthinking a lot of other people."
Also free online from RAND:
Jonathan Cave, Introduction to Game Theory
J. C. C. McKinsey, Introduction to the Theory of Games
Melvin Dresher, Games of Strategy
Martin Shubik, On Gaming and Game Theory
Thomas Schelling, Prospectus for a Reorientation of Game Theory
Kahn and Mann, Game Theory
Lloyd Shapley, n-Person Game Theory
Lloyd Shapley, Utility Comparison and the Theory of Games
Berkovitz and Dresher, A Game Theory Analysis of Tactical Air War
Bohnenblust, Shapley, and Sherman, Reconnaissance in Game Theory
Hamilton and Mesic, Using Game Theory to Analyze Operations against Time-Critical Targets
G. Haywood, Military Doctrine of Decision and the von Neumann Theory of Games
Samuel Karlin, The Theory of Infinite Games
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