Tag Archives: Gambling

Game Theory, Behavioral Finance, and Investing: Part 1 of 5

Watching the market this year has been like observing an exercise in game theory and behavioral finance, and the two fields are closely related.  Game theory is the study of how a rational person makes decisions in uncertain situations.  As the name suggests, game theory was developed with the intent of developing optimal strategies in games in which chance or the decisions of an opponent play a role in your outcome.  Game theory focuses on how rational players can make the best decisions to maximize their satisfaction.  Behavioral finance adds the nuance that, in real life, people do not necessarily have all available information and, even if they do, they often make decisions that are inconsistent with those made by a perfectly-rational and fully-informed decision maker. Continue reading

Gaming the Numb3rs

Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.

Tom Stoppard’s Rosencrantz and Guildenstern are Dead  presents Shakespeare’s Hamlet from the bewildered point of view of two of the Bard’s bit players, the comically indistinguishable nobodies who become headliners in Stoppard’s play.  The play opens before our heroes have even joined the action in Shakespeare’s epic. They have been “sent for” and are marking time by flipping coins and getting heads each time (the opening clip from the movie version is shown above).  Guildenstern keeps tossing coins and Rosencrantz keeps pocketing them. Significantly, Guildenstern is less concerned with his losses than in puzzling out what the defiance of the odds says about chance and fate. “A weaker man might be moved to re-examine his faith, if in nothing else at least in the law of probability.” Continue reading

Gaming The System

Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.

When I was a kid I had a paper route.  One of my customers was a barber who made book on the side.  Shocking, I know.  The giveaway was the group of guys always hanging around but not getting their hair cut and the three telephones on the wall that rang a lot.  Even as a kid I could tell that something was up. Continue reading

The Facebook IPO: Why Gambling with Your Portfolio Rarely Pays Off

In the academic finance world, it’s fairly common to find comparisons of investors to gamblers and certain types of stocks have been referred to as ‘lottery tickets.’ I’ve found that this comparison is actually quite important. There is an odd paradox between the assumption that investors are rational when it comes to investing, yet still spend an awful lot of money playing the lottery.  When we speak of “lottery ticket” investments, we are talking about investments that have a small probability of a big “win” and a large probability of a modest “loss.” And this is precisely the situation with lotteries.

The reality is that people spend considerable sums of money on lottery tickets, a money gamble that has a negative expected value. This same appeal (big, low-probability win, modest high-probability loss) also seems to motivate some investors. Continue reading

Jeff Ma, Arthur Levitt and Investor Gambling

Jeff Ma knows a good bit about gambling, and he says that’s just what investing is, gambling.  The twist: for his money, long-term, diversified  investors are the smart betters.

That’s because they do three good things: Continue reading