Game, Set and Nash

header-final

A loser doesn’t know what he’ll do if he loses, but talks about what he’ll do if he wins, and a winner doesn’t talk about what he’ll do if he wins, but knows what he’ll do if he loses – Eric Berne

John Nash Jr., 1994 Noble Prize winner in economics for his contribution to game theory died last week in a car crash in USA. Hollywood movie “A Beautiful Mind” is based upon his life played by Russell Crowe. As tribute to his genius, below is an amateurish journey through the wonderful world of Game Theory.

As people we interact, act, negotiate, win and lose. As we playing out our part in the interactions we are always considering alternatives, weighing their effectiveness and assuming the response of the other party. Decision making by humans has been a subject of interest to many psychologists. Eric Berne’s Game People Play is a classic book on the same. His student Thomas A Harris wrote the blockbuster “I’m OK, You are Ok”.

Psychology is an interpretative science. Few mathematicians and economists tried to give it a more structured feel – method and maths to be precise. John von Neumann was the pioneer of what is now called the Game Theory.

Game Theory is a mathematical study of conflict and cooperation between rational decision makers. Simply defined it is interactive decision making theory. Game Theory is interpreted through games and by studying the outcome of the games. A simple and famous game is “Prisoners Dilemma”.

Suppose A & B have been caught in a financial scandal which they operated together. Both are lodged in different cells and being interrogated without knowing what the other is saying (confessing or denying). Herein lies the dilemma as both want lesser prison sentence. There are 4 game outcomes with legal implications:

  1. If A pleads not guilty and B confesses, B will get 1 year sentence and A will get full 5 years
  2. If both plead not guilty and implicate the other, both will get 2 years sentence.
  3. If both plead guilty and also implicate their partner, both will get 3 years sentence.
  4. If B pleads not guilty and A confesses, A will get 1 year sentence and B will get full 5 years

Each of course want reduced prison time but are not sure what the other is up to. What is the solution?

Nash Equilibrium: Nash introduced the equilibrium concept to resolve the above and similar game situations (which are more complex, with more players and different payoffs). In the above the Outcome 2 is the equilibrium point. It is not similar to Aristotle’s Golden Mean where in we arrive at a mid-point to close out the interaction (typical negotiation in Indian bargain shop – na mera 30, na aap ka 50, chalo 40 par close karte!)

As per Nash, equilibrium is arrived at for every scenario when all the players know their own and their opponent’s strengths and no side will benefit by changing course. For example, India and Pakistan know their strengths, weakness and loss expected on conventional war and hence do not indulge in it. Similar was the situation between US and Soviet Union during Cold War.

RBI faces a highly complex game with interest rates. Increase in rates may reduce inflation but will increase cost of doing business which can lead to further erosion in economic activity but will receive higher hot money. Reduction in rates will increase inflation but will reduce cost of funds but may not increase economic activity (due to other factors) but will reduce the savings rate of common man. Damn you raise the rates, damn you lower the rates!

Nash Equilibrium helps all the participants to plan and execute strategies in a better and efficient way thus building an efficient society and environment.

Game Theory is today being used in economics, biology and many other spheres of life.

Game Theory in real life: We do not need a Ph.D in economics to use or understand game theory in day to day life. By applying game theory principles you can do better in financial markets, while buying a car, while buying a house, negotiating a salary hike or playing poker.

Books on Game Theory:  there is lot of good books out there on game theory. Of the few I’ve read these 2 stand out. Thinking Strategically by Avinash Dixit and Barry Nalebuff explains the theory with good examples. Other is The Game Tehory by Uri Bram which is simple and well written (you will know through game theory why women wear yoga pants!)

A tribute to John Nash: “This guy is a genius” was the recommendation with which he came to Princeton as Ph.D student. He lived up and went beyond that description. He is the only one to win both Abel Prize (for mathematics) and Nobel Prize(economics) – highest honour in both the fields. Both his award winning works came in the first 30 months of his graduate study. His Nobel winning work is just a 23 page document!  At a very young age he was diagnosed with schizophrenia and had to undergo treatment after which he returned to active work after 21 years.

His life and struggle with schizophrenia is the basis of the film “A Beautiful Mind”. He died in a car crash while returning home after receiving Abel Prize. Reportedly he was not wearing a seat belt and might have missed the equilibrium that the belt would have provided and thus saved his life! Such is the game of life!

RIP John F. Nash Jr.

 

Please follow and like:

Mast Read – Books on Finance

header-final

Books like ships, can take you far – Aldous Huxley

Of the 7 deadly sins greed is only one sin that works both ways – productive and destructive. Productive by pushing man to explore beyond boundaries to build, create and grow. Destructive in the way it shreds the moral compass with never ending clamour for more.

According to historians and anthropologists commerce, management and money evolved before writing. One of the earliest writings is about commerce – transaction slips on papyrus or on stone tablets. Art, literature, poetry etc came much later.

Greed by itself is an interesting subject. Study of human behaviour, money and markets – on their own or in their various combinations – have produced rich printed material to think and learn. Last 250 years of industrial economy has been witness to excellence, power and sheer stupidity with greed being the common thread behind many a success and failures.

Listed below are a few books which capture in detail human nature, success and failures, fall of great and stupidity of the knowledgeable. Read and enjoy them as much as I did.

THE GREAT CRASH 1929 by John Kenneth Galbraith (1955). This concise, insightful history has never been out of print since it was first published. Why? “Every time it has been about to pass from print,” Galbraith himself wrote in 1997, “another speculative bubble … has stirred interest in the history of this, the great modern case of boom and collapse.”

BARBARIANS AT THE GATE: THE FALL OF RJR NABISCO by Bryan Burrough and John Helyar (1990). This story of an iconic deal, the $25 billion leveraged buyout of RJR Nabisco (co-written by a FORTUNE senior writer), has all the stuff of great business journalism–skullduggery, cigars, trophy wives, and enough greed to sink Wall Street. Wretched excess has never read so well.

BUILT TO LAST: SUCCESSFUL HABITS OF VISIONARY COMPANIES by Jim Collins and Jerry I. Porras (1994). Begin with the simplest of questions: What makes great companies great? Then research the heck out of it. It’s a big, hairy, audacious goal–but then, this book coined the phrase.

CAPITALISM, SOCIALISM, AND DEMOCRACY by Joseph A. Schumpeter (1942). Ignore the title and skip straight to Chapter 7, “The Process of Creative Destruction.” Look around, and you’ll see it happening everywhere.

THE SMARTEST GUYS IN THE ROOM by Bethany McLean and Peter Elkind (2003). This riveting account of the Enron debacle (by two FORTUNE senior writers) is unsparing in laying the blame at the feet of all the guilty parties. It explains not just how Enron lost its way, but how all of Wall Street did as well.

THE WAY WE LIVE NOW by Anthony Trollope (1875). Trollope’s classic satire about Victorian London, where speculators and trust-fund fops “had but a confused idea of any difference between commerce and fraud,” feels eerily familiar to observers of modern corporate miscreants.

THE EFFECTIVE EXECUTIVE by Peter Drucker (1966). Before you can manage anyone else, you’ve got to learn to manage yourself. In this slim volume, Drucker tells you how.

REMEMBER EVERY NAME EVERY TIME by Benjamin Levy (2002). Here’s a book that delivers on its promise. Read it, and you’ll never stare blankly at an employee or a client again.

THE PRINCE by Niccolò Machiavelli (1513). Machiavelli wasn’t as Machiavellian as he is made out to be. Today we’d probably call him “pragmatic.” But his treatise–penned after losing his political job in Florence–was shockingly frank. Power and idealism, he said, don’t really mix.

WHEN GENIUS FAILED: THE RISE AND FALL OF LONG-TERM CAPITAL MANAGEMENT by Roger Lowenstein (2000). Lowenstein’s book offers a rare look inside the secretive world of hedge funds. It is also a story of greed and power gone awry, and that makes it a modern classic.

WHERE ARE THE CUSTOMERS’ YACHTS? by Fred Schwed Jr. (1940). In this mordantly funny critique, a former stock trader reveals that most stock market pros are greedy fonts of self-serving nonsense and most customers are greedy fools. (No, not much has changed since 1940).

A Random Walk Down Wall Streetby Burton G Malkiel. When Google went public, its employees became overnight millionaires. To help them guide them in managing their new found wealth Burton was one of those invited to speak to and guide their employees. Must read for both technical and non-technical analysis of markets, investment and greed.

A Little Book of Common Sense Investing by John CBogle. He is the founder and CEO of Vanguard group which built wealth in markets without the adrenalin and excitement of actively managed mutual funds. Another master who was invited by Google to speak to its new millionaires.

Millionaire Teacher by Andrew Hallam.An English school teacher becomes a millionaire by following 9 simple rules of investing. Read it -you become a good student of investment and hopefully a millionaire!

Write back to share any other books you have liked and worth a read.

Bye

Kamesh

Please follow and like:

Bystanders of Bombay

header-final

Archana died. In broad daylight.  In Mumbai. Amid 100’s of onlookers. She could have been saved. She was 22 years.

It is a repeat of countless such incidents that happen across India, across the world. A person is severely injured or attacked in a public place in the midst of hundreds. Not one steps up to help or protect or call the police or do anything.

Let me share the outline of Archana’s incident.

Archana was hit by a speeding car on the Western Express highway, Mumbai’s busiest road near the Hub mall (next to my office). It was 11 am on May 13, Wednesday. She was shifted on to the pavement, a small crowd gathered and everyone watched for 20 minutes as she bled to death. A hospital was 5 minutes away, a police station 50 meters away. One simple action of moving her to the hospital immediately would have saved her. So simple, but it does not happen. Not just in India, everywhere. Why?

Social psychologists call it the Bystander Effect. The bystander effect, or bystander apathy, is a social psychological phenomenon that refers to cases in which individuals do not offer any means of help to a victim when other people are present. The probability of help is inversely related to the number of bystanders. Simply put we get frozen in our boots and we do not take the next steps in presence of many people.

You can test it by yourself. Next when you are in a group of people (not close friends) let a pen or key chain on to the floor. Chances are no one will point out the item and call attention to it. Even you will not do it when in a group of unfamiliar members. That’s why at the end of every conference you have mobiles, key chains etc lost or lying around. Now try this when alone with a stranger. 9 out of 10 times you will get back your stuff. We are more careful even with our good instincts in presence of strangers! It’s not that we stone-hearted or we don’t care. It’s one of those unsolved mysteries of human mind!

What to do in case of an accident you witness: Like all aspects in life, take charge and do something! You need not be an expert. In trauma care language, you are the first Person on the Scene. Do the ABC – airway, breathing and circulation. Clear the surrounding, allow more air to circulate and immediately call for help (call others around you, dial for an ambulance and police). Again the wonders of human psychology start working. Once one member steps in and acts, others follow!

Knowing what not to do is also very important. Wrong care can lead to unintentional hurt. Below are 2 links which will help you guiding what to do in case of an accident.

http://www.redcross.org.uk/What-we-do/First-aid/First-aid-tips-and-videos

http://www.sja.org.uk/sja/first-aid-advice/unconscious-and-not-breathing.aspx

What if you are the victim: If you are the victim you need to apply some psychological principles to get care. If you are conscious don’t expect help to come (remember Bystander Effect). Don’t appeal for help generally. Do this instead: identify one of the members in the crowd and call out, “hey you in blue shirt please come and help”.  Once that member has been called to attention he/she will respond as you appeal to their conscience and goodness (we all are good after all!).

Social psychologists call this behaviour “Rosenthal Effect”. The Pygmalion effect, or Rosenthal effect, is the phenomenon whereby the greater the expectation placed upon people, the better they perform. One he/she steps up, others will join to support in the good cause as the Rosenthal effect spreads to them.

One hand that extends to help is better than 2 hands that come together for prayer. Let’s not be bystanders. Let not another Archana die for want of action.

Bye

Kamesh

Please follow and like:

Summer Holidays

header-final

In western countries school holidays means… mountaineering, rafting…

In India, chalo naani ka ghar!

It’s one of those Whatsapp jokes that got me thinking. Did we as children grew up less and are our children growing up less because we/they savoured the love of grandparents? Between grandparents and mountaineering which is a better choice? If given a choice, both – a week in an adventure camp and a week with grandparents. If given only one to choose, grandparents.

My reason is simple. Spending time with those who have spent a longer time in this world is an education in itself. Unconditional love which a child will experience with their grandparents will shape their minds to love and care which is missing today in our transactional society. Respect for elders will come with spending time with them. You can go mountaineering even later in life. Time with grandparents is something you will never get at any cost. Add to it the mango time, pickle making, train journeys, time with cousins…

Something more interesting is happening in the society. Our children might be the last one or two generations which experiences the real meaning of brother, sister and cousins. I read recently that the Chinese children do not understand the concept of brother or sister as they are the only child in the house due to the one child policy. With their parents also being the only child in their respective lives, concept of cousins is also lost on them! Imagine the response of a Chinese child when he is read a classic like Mahabharata or Iliad. Brothers, sisters and cousins fighting with each other are a complicated plot of human emotions which he can never enjoy as he has never experienced any. He will always wonder, “should I be happy or unhappy that I do not have brothers, sisters or cousins?”

Let me conclude with sharing something beautiful. Summer has been described with utmost beauty by Kalidasa in his classic RituSamhara (Garland of Seasons). It is a classic 6 cantos poem describing 6 seasons (Summer, Spring, Monsoons, Autumn, Frost and Winter). It starts with summer. Kalidasa paints a very harsh summer. It is so harsh that animals have forgotten their enmities to survive the heat. A snake in the forest opened its hood hoping to cool itself. A frog is sheltering in the shadow of the snakes’ hood. Driven by thirst the frog sticks its tongue to capture any moisture in the air. A passing fly rests on the wet tongue of the frog! Lucky we can just switch on the airconditioner!

Amazing romanticism from Kalidasa! No wonder he is one of the top 100 poets of the world! Cool he isn’t he?

Sure let’s send our kids to the summer camp. But definitely take them to Naani’s house !

Bye

Kamesh

Please follow and like: