Predictions...

Predictions. Thinking about Bruno (see Leigh's post below) and thinking about hurricane Bill, the thread here this week has been about predictions. One of the more marvelous things about the USA is the Weather Channel. If you live in the States, you no doubt think the Weather Channel is daft, repetitive, and, full of commercials. On the WC (oh dear - apologies), it is only serious weather if they can find some sort of way to feature an automobile in some kind of weather peril. Prone to sensationalism, preying on fear, and like a drug to a control freak, the weather channel works every angle like a preacher. But really, if you live in the UK where the meteorologists go home and stop working at 5pm every evening, a 24 hour on demand Weather Channel is an amazing thing. At least to a girl like me.

I must say, one of the things that started to upset me a bit last evening whilst waiting for the Hurricane update was the insipid background music. Apparently they think differently. To the extent that one can buy a track of Weather Channel Muzak. I kid you not -- find it here. I do hope Bruce Bueno does not conduct his interviews with anything like that playing in the background. But perhaps he uses it on his clients. Game Theory must have a chapter or two on the use of subliminal stimulants...

Guest posting: game theory and Iran

Hello again to missmarketcrash's readers. I have the privilege once again of making the occasional contribution while she's on holiday.

Today, in honour of missmarketcrash's Rhode Island resort, I was very interested to read this article from her near-neighbour the New York Times.

My own work is about using behavioural economics to understand, predict and perhaps influence some aspects of decision making.

So it was fascinating to learn about Bruce Bueno de Mesquita (must remember not to compress this to 'Bruno' which is what I nearly typed) who does something similar but based fully on rational actor theory. He uses game theory techniques and a software system to project how power plays and coalition building will result in political or business outcomes.

Now lots of people are sceptical about the effectiveness of this kind of prediction. It's clear that the results are highly dependent on the input parameters - in the Iranian example, he suggests that Ahmedinejad's "desire" is 90, "power" is 5 and "resolve" is 90. To be honest this sounds like nothing quite so much as the strength, stamina, intelligence and charisma scores in Dungeons and Dragons, but you do have to start with some numbers if you're going to build any kind of model.

The article may be oversimplifying his approach, but these figures seem just to be assumptions not based on any empirical measurements. The proof, in any case, will be in the pudding, but it's a little slippery to get hold of any testable predictions because lots of it is covered by commercial confidentiality - or worse, national security. However:

...a study by the C.I.A., now declassified, found that Bueno de Mesquita’s predictions "hit the bull's-eye" twice as often as its own analysts did.

Anyway my interest is piqued because, despite the suggestion that this is based on a rational agent model, it appears to use some very psychological variables which aren't incorporated into standard game theory: preferred outcome, desire and resolve. I suspect that behavioural game theory might be a better description of this.

I will be following Mr Bueno de Mesquita's work with interest - we will have an interim result by October as he has predicted a student uprising in Iran.

Zugzwang...

Zugzwang...the Germans are certainly good at coming up with amazingly appropriate words for any situation.  In combinational game theory, the meaning of zugzwang is simply when a player is in a position to make a move in a game, and, any move taken will lead to defeat.  In chess, the meaning is expanded to cover situations where a move by a player will make that players situation worse.

Games of strategy like chess or checkers are enticing because we can see all the moves and implications as they progress.  In sum, the game is public in nature.  Combinational game theory concentrates on the combination of two things and forecasting the outcome.

Game theory in an economic or market focused sense gets a bit more complex as one might deduce.  There are obviously more variables and much of the information is not "public".

Now comes the slow drift downward of the markets.  The banks are releasing data of losses and the mathematical magic show is going public.  A slow evening and morning was spent reading the Counterparty Risk Management Policy Group's most interesting but tedious essay entitled "Containing Systemic Risk: The Road to Reform".  It was written in the beginning of August of last year and, by now, ought to be on the best seller list.  Perhaps the banks who wrote it ought to think about a career in publishing. I do have to admit I did drift more than a bit while trying to read it.  If they could spice it up, it might make the banks a little cash on the side - something they seem to really need.  Why not take all this captivating but dead tedious information and put it on a nicer plate - I envision a Vanity Fair style essay with the behind the scenes personality profiles and caricatures...