Chess players offer insight on why financial markets behave erratically
A study led by Dr Galla from The University of Manchester and Professor Doyne Farmer from Oxford University is trying to find an answer to why you never seem to win at skill-based, complex games such as poker and chess.
In simple games with a small number of moves, such as Noughts and Crosses the optimal strategy is easy to guess, and the game quickly becomes uninteresting.
However, when games became more complex and when there are a lot of moves, such as in chess, the board game Go or complex card games, the academics argue that players’ actions become less rational and that it is hard to find optimal strategies.
This research could also have implications for the financial markets. Many economists base financial predictions of the stock market on equilibrium theory – assuming that traders are infinitely intelligent and rational.
But agents aren’t so rational, as we all know, and Economics, as a science, aims to best approximate the agents behaviour.
So there is little chance we can actually predict market patterns or anticipate general reaction.
Much of traditional game theory, the basis for strategic decision-making, is based on the equilibrium point – players or workers having a deep and perfect knowledge of what they are doing and of what their opponents are doing.
“With trading on the stock market, for example, you can have thousands of different stock to choose from, and people do not always behave rationally in these situations or they do not have sufficient information to act rationally. This can have a profound effect on how the markets react.”
“It could be that we need to drop these conventional game theories and instead use new approaches to predict how people might behave.”