Game Theory Applications

Game Theory Applications

SIG employees enjoy success in the financial markets in part because of the application of game theory and risk management concepts to complex market dynamics. The activities listed below highlight different aspects of the strategic landscape in which we operate.

Poker

SIG commonly uses poker to teach new hires about decision making under conditions of uncertainty. In poker, players must make decisions based on incomplete information, using probability to determine the expected value of those decisions. Similarly, SIG traders make risk decisions based on the limited information they get from the markets and relate that to the expected value of each trade.

Magic the Gathering

Several employees at SIG hone their decision-making skills by playing Magic the Gathering. While playing Magic, you have to be aware of numerous things going on simultaneously. For example, you must be able to read your opponent, and be able to perform card evaluation quickly. There are multiple factors that need to be analyzed before doing a trade. Skills gained from Magic can help assess counterparty motives and evaluate risks associated with a trade.

Chess

There is neither risk nor uncertainty in chess; you know everything that your opponent knows about the game, and there are no outside forces that alter the course of play. The best strategy in chess does not necessarily depend on what has already happened in the game, but the past actions of your opponent can provide insight into their thought process. This “shadow of the past” may also be considered in trading, where understanding the actions of other market participants can improve a trader’s decision-making process.

Team Sports

There are many carryover lessons to trading that come from team sports. While the image of the lone trader standing against the market makes for a good movie, in reality many traders work collaboratively, each playing his or her part in information gathering, assessing alternatives, execution, and risk management.

Bridge

Successful bridge players are able to remember the actions of their teammates and apply those actions to their strategy. Our traders rely on our common language in discussing risk and strategy to make the best decisions in the marketplace, anticipating the impact of their “teammates’” actions on other parts of the market.

Blackjack

Blackjack is a game of memory, which is extremely important in trading. Traders need to remember orders, positions, and risks. Being able to remember previous cards (in the game) or orders (in trading) allows our traders to better assess risk and probabilities.

Strategic Board Games

Board games can be more than just ways to pass the time or simple games of chance. Certain board games require strategic thinking, pattern identification, and quick response time. Games that we find to be more strategic and relevant to trading include Scrabble, Set, Settlers of Catan, Backgammon, Puerto Rico, San Juan, Powergrid, and Dominion. In these games, players must work either collaboratively or independently and act quickly or think strategically. All of these games highlight different aspects of the decision processes that apply to various trading decisions.

Video Games

Certain video games require quite a bit of strategy and can possibly incorporate multiple (sometimes numerous) players at once. This environment can provide a helpful platform for understanding the trading environment. Action games require quick reactions to small changes in a potentially over-stimulating environment. This closely mimics the trading environment, where traders keep track of many factors while looking to react efficiently to important changes.