For some time, and as mentioned in previous articles of mine, I have wondered how there could be over 50 banks in the UAE, around half of which are full operating banks, given a population of circa 8 million, over half of whom are blue collar workers not in need of banking services. Basic economic theory would suggest that competition would lead to mergers or banks withdrawing from the market until the supply of banking services dropped to a level commensurate with the level of demand for banking services.
Tag Archives: Game Theory
The Pirate Code is behind Pay Inequality
In the fourth article of the game theory series, we build on the Saudis out-bluffing OPEC and The Joker forcing the good people of Gotham to choose between game theory and Batman. In this installment, you will learn how blood thirsty, treasure hunting pirates might just explain the ridiculously large wage gaps in modern day corporations. To set the stage, one must think like a pirate, indeed be the pirate. I do not mean the rum soaked debauchery of commercially suggestible women in a tavern named Hurricane. What I mean when I say ‘think like a pirate’ is think selfishly. That’s what successful senior executives do. Isn’t it?
Gotham Game Theory: The Joker's Dilemma
The most famous example used to explain game theory is a game called The Prisoner’s Dilemma. A far more fun approach is looking at a game that The Joker introduces to the hit movie The Dark Knight, one of the Batman movies.
In the movie The Joker rigs two ferries with bombs. Ferry A is filled with innocent civilians and Ferry B is filled with prisoners and their police escort. Ferry A has a detonator for the bombs on Ferry B, and Ferry B has the detonator for the bombs on Ferry A. That is the setup, now for the rules.
If Ferry A detonates Ferry B and kills everyone on it, then the passengers on Ferry A survive. If Ferry B detonates first, then they survive. If nobody detonates within 30 minutes, then both ferries explode and everybody dies.
Game Theory's Relevance to Investing: The Basics
In many ways academia is no more immune to politics and arrogance than Wall Street. A great example is the view taken by pure mathematicians, who study abstract concepts regardless of real world applicability and think of their subject as intellectually uncontaminated as opposed to physicists, who think they are masters of the universe because they can understand it. This is a shame as it has created unnecessary barriers to the integration of mathematics as a useful tool for businesses and investors.
Physicists have had greater success, possibly due to their interaction with the real world in terms of such facets as flight, space travel, nuclear power, etc. However, the absence in the business world of other areas related to math has created market shattering fiascos such as Long Term Capital Management and the Doom’s Day Formula. In this post I’ll explain why and what to do about it.
The Bluff: An Important Strategy Tool
There seems to be a strong belief that playing poker teaches people how to invest or run a business. This is of course nonsense. The mathematics behind poker is complex and needs years of formal study to understand the game. The more appropriate notion is that a strong understanding of game playing is extremely useful to investing and business.
The branch of mathematics relevant to game playing is not, as most believe, probability but is called, not surprisingly, game theory. Game theory was made famous by the film A Beautiful Mind, depicting the life of one of the main developers of this mathematical field.
In this article I’d like to address just one facet of a successful poker strategy and that is bluffing. Somehow bluffing has taken on the connotation of lying or otherwise being dishonest. Many of the proponents of “poker as a substitute for an education” believe that this gives them license to be dishonest in their business dealing, in particular in negotiations. Their interpretation is wrong both mathematically and ethically. They might not care about the ethics, but from a mathematical point of view, lying is extremely sub-optimal and completely misses the point.