Tuesday, May 28, 2019

The Model Thinker #21 : Game Theory Models Times Three

Image result for tycho nestoris

This chapter is about game theory where models describe a situation of zero sum games. I don't want to get into a discussion on zero sum games because they are more useful in a situation where you trade in derivatives or currency. Someone's win has to come off from someone's losses. This is the kind of game that I really hate getting into.

Instead the addendum of the chapter talks about something more interesting which is the problem of identification.

What causes people to take up a particular investment approach like value investing or quantitative investing ?

The peer effect model reasons that people adopt an approach when influenced by their peers. If that were true, a person who joins Seedly would become more open minded to buy whole life insurance, where a network of FAs are brazenly picking fights against the BTIR crowd. If this person joins BIGScribe, I am guessing he is more likely to adopt a more hostile stance towards whole life insurance, preferring to invest their way out of any personal situation. At least so far, the design of BIGScribe is that there are no commissioned salesman holding admin roles within the group.

The sorting model suggests that people sort themselves out and they congregate in the same groups that have the same philosophy towards insurance and investment. If you consider the sorting model as the dominant one, you will simply argue that Seedly attracts more FA types and folks who are more open-minded to what is sold by the insurance industry. Similarly, BIGScribe is, somehow, a magnet for very sceptical critics.

The problem of identification is that if we only have a snapshot of data, we can't really tell apart which effect is a stronger play. We have to observe participants in each Facebook group over time. Right now, I believe both effects are always in play between the FB groups. Some folks will be influenced by the regular posters in each respective group but eventually those with the same outlook (or agenda) will congregate within the same cluster.

In designing a good training to enact change in a client, both effects will have to be exploited at the same time to benefit the customer.

I like to to get beginners invested as soon as possible, treating dividends as some kind of "gateway drug" to get a rookie investor hooked ( like Walter White ). Of course, because of the amount of skin I have in the game, I have to pre-select students who will most likely adopt my approach towards investing. Right now, I am aware that engineers, accountants and teachers somehow have a strong affinity to what I teach in class.

Should I soften my style to make it more touchy-feely and emotionally charged so as to appeal to the artistic and designer types that I generally do not have an affinity with ?

Let me give you a hint with a quote from Game of Thrones :

"I am neither kind, nor a lord, Your Grace. I am merely an instrument of the institution I represent, it's wellbeing is a matter of arithmetic, not sentiment." - Tycho Nestoris of the Iron Bank of Braavos.

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