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Gaming the Market: Applying Game Theory to Create Winning Trading Strategies
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From the Inside Flap
Gaming the Market "Game theory is hot."
--The Wall Street Journal
Gaming the Market: Applying Game Theory to Create Winning Trading Strategies is the first book to show investors how game theory is applicable to decisions about buying and selling stocks, bonds, mutual funds, futures, and options. As a practical trading guide, Gaming the Market will help investors master this revolutionary approach, and employ it to their advantage. Although game theory has been studied since the 1940s, it has only recently been applied to the world of finance. Game theory champions garnered the 1994 Nobel Prize in Economics, and, today, this theory is used to analyze everything from the baseball strike to FCC auctions. Increasingly, game theory is making its mark as a potent tool for traders. In Gaming the Market, economist Ronald B. Shelton provides a model that enables traders to predict profitability and, as a result, make effective buy and sell decisions. Stated simply, game theory is the study of conflict based on a formal approach to decision making that views decisions as choices made in a game. Whether playing individually or in a group, each player in a conflict has more than one course of action available to him, and the outcome of the "game" depends on the interaction of the strategies pursued by each. Shelton offers real-world examples that reveal how the principles of game theory drive financial markets--and how these same principles can be used to develop winning investment strategies. Through Shelton's organized and precise explanations--he uses familiar games such as chess and checkers to illustrate his points--readers gain a solid understanding of the key principles of game theory before applying them to actual financial market situations. Gaming the Market examines the interaction between price fluctuations and risk acceptance levels and gradually constructs a game theory model which proves that there are probability-based formulas for determining the profitability of any given trade. With appendixes on T-Bond futures, mathematical representations of the model, and QuickBasic code for calculating relative frequencies, Gaming the Market provides a thorough overview of the rules and strategies of game theory. This indispensable reference will prove invaluable to novice and seasoned players alike.
RONALD B. SHELTON is an economist specializing in developing financial applications of game theory. He is currently employed as a Managing Director in the National Accounts Department of Commercial Lines with the Travelers Indemnity Company.
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