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| Economy |
| Fighting Wall Street Predators with Game Theory |
| 2016-04-08 |
| [Evonomics] The newest Wall Street bestseller by Michael Lewis, Flash Boys, chronicles the unlikely emergence of fairness in the corrupt world of high-frequency trading (HFT). It’s a gripping and enlightening read for anyone who doesn't already know the story, but it becomes especially enlightening when viewed through the lens of evolutionary game theory (EGT). The EGT story is simpler than the HFT story. It consists of only four actors, who reflect combinations of two binary strategies: whether to cooperate or defect in a social interaction, and whether to punish or ignore defections by others. These actors interact with each other in a social environment defined by the parameters of the game. In one classic version of the game, each player is given an endowment, which they can keep or contribute to a common fund. The fund is multiplied and distributed equally to the players. This is a social environment that rewards defection, since players that don’t contribute get the highest returns. When actual people play the game, most start off moderately generous, but as soon as they realize that they are being exploited by others, they withhold their own contributions. Cooperation goes down the drain, leaving only defection and the lack of social benefits. There is no way to punish defectors in this version of the game, so the punish vs. ignore option is inoperative. The only way to punish defectors is to withhold one’s own cooperation; that is, to become a defector oneself. |
| Posted by:Besoeker |
| #1 In the actual real-world game, there ARE ways to punish so-called defectors, such as various actual/potential regulations and laws, such as those against fraud & conspiracy in restraint of trade. Potential enforcer / regulators like Eric 'Place' Holder and the US Congress have refused to do that part of the job. HFT is & has been corrupt from its very beginning, serving no useful business / financial purpose beyond lining the pockets of the insiders. A small fee on placing each & every trade would eliminate HFT rather quickly. Do not discuss this with anyone! |
| Posted by: Anguper Hupomosing9418 2016-04-08 16:00 |