Yes, it’s all finance all the time, here at the Pontiff. Where else can you go to get your daily dose of extralusionary intelligence?
Once again it’s a New York Times article Maybe Short-Selling Isn’t So Bad, After All. Now I don’t know much about how the changes in shorting stock (the removal of the uptick rule, where one could only short the stock on an up move in the stock, and the banning of shorting of a large group of stocks) effect trading, but I think I’ve plaid enough games in my life to know that the following argument is a good way to spot a sucker:
Has the rule’s removal been an important contributor to the bear market of the last year? Professor Reed doubts it. Before scrapping the uptick rule, the S.E.C. ran a pilot program to test the possible consequences. In the test, the rule was lifted from hundreds of stocks that were part of the Russell 3000 index. The trading patterns of these stocks were exhaustively analyzed in a number of academic studies, all of which concluded that the rule had no significant impact on those stocks’ price movements, Professor Reed said.
Let me get this straight, you site as evidence that the removal of the uptake rule didn’t have any effect during a pilot program in which announced securities which were exempted from the uptick rule as evidence that the uptick rule once unleashed on the entire market doesn’t have an effect? Suppose that you are a player in such a game, and it is true that you could use the removal of the uptick rule to your advantage. What would you do during the pilot program? Nothing at all, of course! Why spoil the upcoming fun? Maybe I’m missing something, but pilot changes in rules of a game don’t necessarily reveal how the players will act when the pilot goes full scale, do they?
In a similar vein, this story from NPR (oh crap I’ve revealed myself a lefty liberal, NYTimes and NPR, oh my!) this morning on Treasury Secretary Paulson tells me that he is a great player of games. The story includes a description of Paulson playing paddle tennis for the first time and how his partner ran him around like crazy and was totally demolishing him to the point that he thought Paulson as going to fall over. The partner asked if he wanted to stop and Paulson said “no” but ended up winning by powering through. The final quote is from Paulson’s sparing partner:
“He’s been trying a bunch of things, in the best of faith, and they haven’t worked. And it’s just like he took a breadth, and he said ‘we’re not going to let this go, we’re going to turn it around.'”
Most people will probably focus on Paulson’s perseverance, but what I see in this quote is a game player. “He’s been trying a bunch of things.” If that doesn’t describe the modus operandi of a player of games, I don’t know what does.
David: Your god? Yes my thesis was long and bloated. I would not recommend reading it.
Good idea reading PhDs. They are often more readable than the papers upon which they are based. And when you write your own you should include a “Philosonomicon” section!
Back in the very early 80’s, the Hunt Brothers tried to corner silver. They almost did, in a most elegant trade. The CFTC decided to only allow silver to be sold for liquidation purposes only, banning short selling. Liquidity evaporated, the silver market puked, and it took 8 years for the market to recover. Chicago silver never recovered.
I don’t believe in an uptick rule. Commodities never had an uptick rule, and if one sold too much of a commodity short, the market made sure that you got your ass handed to you on a platter.
Jeff
Jeff
My own (uneducated) opinion so far has been that the arguments that short selling were to blame for the market falls in certain banking stocks don’t hold too much water. Actually, more properly I’d say I’m neutral in that I haven’t seen any evidence either direction which makes me conclude otherwise. I’m just amazed that an argument using a pilot program would be used as evidence. I guess this shows a very fundamental difficulty in studying markets with sophisticated investors. Probing how these markets will react when you are broadcasting that you are probing seems to me a good way to reach false conclusions (as the SEC apparently did with the uptick rule.)
The idea that investors would forego taking advantage of the removal of the uptick rule during the pilot study doesn’t make sense to me. While it could be collectively to investors’ advantage if they all conspired not to exploit the removed uptick rule during the pilot study, it would be to any individual investors advantage to “defect.” So the Nash equilibrium would be for each investor to just go for it, even during the pilot study.
It depends strictly on your utility function, doesn’t it? If future returns are just as important as current ones, then disguising your strategy is important, right?
My take on the short selling regulations is that the people in charge have been handling it in the worst possible way. First, you don’t make a major rule change like this overnight; you propose the rule change and give interested parties a chance to discuss whether the rule change is needed and whether the effects of the rule change are worse than the effects of not changing the rule. Second, the rule should apply equally to everybody; it makes no sense to ban shorting of ABC while allowing it for XYZ (assuming both stocks are still trading).
Although “He’s been trying a bunch of things” is better than trying the same thing over and over again in hopes of a better result, it tells me that Paulson doesn’t know what he’s doing. It’s as if he’s playing the game for the first time.
And make no mistake: We are playing games here. This is a Calvinball tournament: they’re making up the rules as they go along.
My god. Your thesis was 450-ish pages.
How about:
Oh… dear … GOD! Man!
An epic intro to an epic thesis.
Since I might be starting a phd program in the spring, I’ve taken to reading [skimming] the theses of the people that I read, as I come across them.
I guess that depends on how many of the players you think are sophisticated, on whether your strategy would be better masked in a larger market, and the actual rate you believe you can win at using your strategy.
Yes, but in this case it only works if you can count on all the other players to disguise the strategy too. I think you’re right that my blanket statement about the Nash equilibrium was wrong. However I think realistically most people would give up on the idea that every player would hide the strategy. They would reason: “assuming that someone is going to spoil it for everyone then that someone might as well be me, because I’ll gain immediate benefit.” Also they will suspect others of reasoning the same way, thereby strengthening their suspicion that someone will spoil it.
Yeah, contrary to my initial gut reaction, I suppose its not obvious what would happen.
Hey David, thanks for the link to the paper.
You guys are dancing around a prisoner’s dilemma discussion. Read this. It will change your thinking a little. Brunnermeier writes a lot about bubbles and raids [where the smart money pounds the not-smart money].
That paper is fun. A little idea, a little experiment, and voila, you can validate all of those movie lines where someone is going, “Wait for it … wwaaaaaaiiiitttt foorrrr iiiiiitt…”
When the same game (same payoff matrix, same Nash Equilibria) is played over an over between the same players, each is building a model of the others’ strategies. As a result, the trajectories show mathematical chaos. This was established at Santa Fe Institute even for a game as simple as 2-player rock-paper-scissors.
I like Harsanyi’s interpretation of mixed strategies. They come about as a result of uncertainty in your opponent’s strategic payoffs. This is why the prisoner’s dilemma has a pure strategy equilibrium, but 2 player RPS only has a mixed strategy equilibrium. There is a generalized uncertainty relation in there trying to get out. You could probably squeeze some quantum error correction ideas into the game theory if you tried hard enough.
Continuing the oversimplifications from yesterday, what happens when Quantum Computers are available?
(1) When players in the game have QCs, they can be entangled, then new Nash Equilibria appear as if by magic. Emergent. I’d show you the quaternionic surfaces if I could.
(2) When the Referee has QC, that can be entangled with the players. More funny stuff can happen.
Somebody want to give hotlinks to best websites with details of the above? Or cites to hardcopy literature?
I’ve got to finish teaching these kids about macromolecules, then go to the College of Ed to step epsilon closer to the Credential which the Bush Administraton’s “No Child Left Behind” forces me to pay for, despite having taught college and university before, and now taken a paycut to teach highschoolers. Yay, Bush! Here’s my blank check. Bail out the bankrupt public school system, please.
Oh: what happens when Quants in the Finance industry have QC?
Continuing the oversimplifications from yesterday, what happens when Quantum Computers are available?
(1) When players in the game have QCs, they can be entangled, then new Nash Equilibria appear as if by magic. Emergent. I’d show you the quaternionic surfaces if I could.
(2) When the Referee has QC, that can be entangled with the players. More funny stuff can happen.
Somebody want to give hotlinks to best websites with details of the above? Or cites to hardcopy literature?
I’ve got to finish teaching these kids about macromolecules, then go to the College of Ed to step epsilon closer to the Credential which the Bush Administraton’s “No Child Left Behind” forces me to pay for, despite having taught college and university before, and now taken a paycut to teach highschoolers. Yay, Bush! Here’s my blank check. Bail out the bankrupt public school system, please.
Oh: what happens when Quants in the Finance industry have QC?