7 ms·

On Zero Sum Games (The Informational Meta-Game)

43 points by ocean_moist 2y ago

russfink 2y ago
And “GTO” means…? (Authors, please expand acronyms at first use.)
- jasonhong 2y ago
  Game Theory Optimal This page has more details: https://blogs.cornell.edu/info2040/2021/11/03/game-theory-optimal-gto-texas-holdem-poker-theory/ https://blogs.cornell.edu/info2040/2021/11/03/game-theory-op...
- ocean_moist 2y ago
  Will keep this in mind for the future.
- raiden_studio 2y ago
  [dead]
highfrequency 2y ago
Actually, in poker it is very effective to study and approximate GTO (either by a human or by machine with counterfactial regret minimization). But yes, no one is looking for GTO in trading. The game is not well-defined. There are thousands of participants each with totally different objectives and win conditions. That makes it not zero sum in the first place. Pension funds, banks, HFT firms can all make money while trading with each other.
- zeroq 2y ago
  It's is also worth to mention that once adversary figure out that you're employing GTO in your decision making it's very easy to exploit. To give it another context: imagine a seasoned chess player playing with a novice who just studied an opening. Once the more experienced player realize that his opponent is playing "sicilian" he knows his opponent game plan, next five moves and can set traps accordingly.
  - highfrequency 2y ago
    GTO means unexploitable. If the player were actually GTO, the worst case would be a draw. The novice playing a standard opening loses because he is a novice, not because he is playing GTO (he is not).
    - Maxatar 2y ago
      Unexploitable does not guarantee a draw. You can play optimally and still lose. However your main point, that GTO can not be exploited, is correct.
      - highfrequency 2y ago
        In a symmetric two player game, being unexploitable means that a draw is the worst case. There is mild black-white asymmetry in chess but that’s a minor point - can just play 2+ games and alternate colors.
        Maxatar 2y ago
        For anyone else reading this wondering how it is hedge funds can fail spectacularly, this is why... People get enamored by theory but forget that the theory depends on subtle details and preconditions that often don't apply in the real world, and end up coming to conclusions that are sound on paper but will not hold up in reality. You are not guaranteed a draw in poker if you play optimally, you can still lose. It is true that being unexploitable and playing optimally yields a expectation of at least 0 (assuming no rake/fee), but expectation over an infinite number of trials is not the same as guaranteeing a draw. There is also variance, which can cause sufficient losses in the short run and given that in the real world people only have a finite amount of resources with which to participate, a sufficiently high variance can knock you out of the competition before you ever get a chance to realize the benefit of a long term positive (or even zero) expectation.
        highfrequency 2y ago
- wat10000 2y ago
  Since every seller is matched with a buyer, how can everyone make money trading with each other? The only way additional money comes into the system is if a new investor appears, or a stock pays dividends.
  - Maxatar 2y ago
    Everyone can make or lose money depending on whether the value of the stock goes up or down and whether the participants own the stock or are borrowing it (short/negative ownership). You mention two factors that can introduce new capital into the system, new investors and dividends, but seem to imply they are negligible or can be ignored... on the contrary those two factors are quite significant contributors and according to some theories dividends are the ultimate and total source of value in the stock market: https://en.wikipedia.org/wiki/Dividend_discount_model https://en.wikipedia.org/wiki/Dividend_discount_model
    - wat10000 2y ago
      The value of the stock going up doesn't mean everyone makes money. Everybody's stuff is worth more on paper, but they can't convert it to money unless they sell it, which means someone else had to buy it and convert their money into stock. The total amount of money remains constant. I didn't mean to imply that those two factors are negligible. Only that they're not part of "trading," i.e. trading is zero-sum but these make the system as a whole not zero-sum. I was responding to "Pension funds, banks, HFT firms can all make money while trading with each other." Which suggests that you don't need other things for everyone to make money, it can happen purely by trading.
      - Maxatar 2y ago
        If you just mean a closed group of people are passing around stock among each other, never able to collect a dividend or add new participants, then sure such a system would not be positive sum. But the participants listed, pension funds, banks, HFTs, etc... are not just trading with each other in a closed system. These participants can all trade with each other and all gain from one another precisely because there are dividends paid out, and new participants. Pension funds need to liquidate or rebalance their portfolio on a short notice or daily basis, so they benefit from trading with HFTs who can take on virtually arbitrary inventory and quickly hedge it, charging a very small and implied fee (usually from a spread or some other implied mechanism), who in turn offload that inventory onto a bank or another pension fund, etc etc... These participants can all benefit from one another's involvement in the market instead of competing against each other.
- ocean_moist 2y ago
  Yeah, almost necessary at a high level (and online), however I play against fish most of the time. I am also 18 and lack connections/capital/time to enter high level games. I would say markets are approx. zero-sum on small time-scales. And low-beta alpha is better sourced from treating the market as zero-sum. Short-term price movements are primarily driven by the redistribution of wealth between market participants rather than by the creation of new fundamental value, making strategic positioning against other traders more effective for generating uncorrelated returns.

43 points by ocean_moist 2y ago

russfink 2y ago

And “GTO” means…? (Authors, please expand acronyms at first use.)

jasonhong 2y ago
Game Theory Optimal This page has more details: https://blogs.cornell.edu/info2040/2021/11/03/game-theory-optimal-gto-texas-holdem-poker-theory/ https://blogs.cornell.edu/info2040/2021/11/03/game-theory-op...
ocean_moist 2y ago
Will keep this in mind for the future.
raiden_studio 2y ago
[dead]

highfrequency 2y ago

Actually, in poker it is very effective to study and approximate GTO (either by a human or by machine with counterfactial regret minimization). But yes, no one is looking for GTO in trading. The game is not well-defined. There are thousands of participants each with totally different objectives and win conditions. That makes it not zero sum in the first place. Pension funds, banks, HFT firms can all make money while trading with each other.

zeroq 2y ago
It's is also worth to mention that once adversary figure out that you're employing GTO in your decision making it's very easy to exploit. To give it another context: imagine a seasoned chess player playing with a novice who just studied an opening. Once the more experienced player realize that his opponent is playing "sicilian" he knows his opponent game plan, next five moves and can set traps accordingly.
- highfrequency 2y ago
  GTO means unexploitable. If the player were actually GTO, the worst case would be a draw. The novice playing a standard opening loses because he is a novice, not because he is playing GTO (he is not).
  - Maxatar 2y ago
    Unexploitable does not guarantee a draw. You can play optimally and still lose. However your main point, that GTO can not be exploited, is correct.
    - highfrequency 2y ago
      In a symmetric two player game, being unexploitable means that a draw is the worst case. There is mild black-white asymmetry in chess but that’s a minor point - can just play 2+ games and alternate colors.
      - Maxatar 2y ago
        For anyone else reading this wondering how it is hedge funds can fail spectacularly, this is why... People get enamored by theory but forget that the theory depends on subtle details and preconditions that often don't apply in the real world, and end up coming to conclusions that are sound on paper but will not hold up in reality. You are not guaranteed a draw in poker if you play optimally, you can still lose. It is true that being unexploitable and playing optimally yields a expectation of at least 0 (assuming no rake/fee), but expectation over an infinite number of trials is not the same as guaranteeing a draw. There is also variance, which can cause sufficient losses in the short run and given that in the real world people only have a finite amount of resources with which to participate, a sufficiently high variance can knock you out of the competition before you ever get a chance to realize the benefit of a long term positive (or even zero) expectation.
        highfrequency 2y ago
wat10000 2y ago
Since every seller is matched with a buyer, how can everyone make money trading with each other? The only way additional money comes into the system is if a new investor appears, or a stock pays dividends.
- Maxatar 2y ago
  Everyone can make or lose money depending on whether the value of the stock goes up or down and whether the participants own the stock or are borrowing it (short/negative ownership). You mention two factors that can introduce new capital into the system, new investors and dividends, but seem to imply they are negligible or can be ignored... on the contrary those two factors are quite significant contributors and according to some theories dividends are the ultimate and total source of value in the stock market: https://en.wikipedia.org/wiki/Dividend_discount_model https://en.wikipedia.org/wiki/Dividend_discount_model
  - wat10000 2y ago
    The value of the stock going up doesn't mean everyone makes money. Everybody's stuff is worth more on paper, but they can't convert it to money unless they sell it, which means someone else had to buy it and convert their money into stock. The total amount of money remains constant. I didn't mean to imply that those two factors are negligible. Only that they're not part of "trading," i.e. trading is zero-sum but these make the system as a whole not zero-sum. I was responding to "Pension funds, banks, HFT firms can all make money while trading with each other." Which suggests that you don't need other things for everyone to make money, it can happen purely by trading.
    - Maxatar 2y ago
      If you just mean a closed group of people are passing around stock among each other, never able to collect a dividend or add new participants, then sure such a system would not be positive sum. But the participants listed, pension funds, banks, HFTs, etc... are not just trading with each other in a closed system. These participants can all trade with each other and all gain from one another precisely because there are dividends paid out, and new participants. Pension funds need to liquidate or rebalance their portfolio on a short notice or daily basis, so they benefit from trading with HFTs who can take on virtually arbitrary inventory and quickly hedge it, charging a very small and implied fee (usually from a spread or some other implied mechanism), who in turn offload that inventory onto a bank or another pension fund, etc etc... These participants can all benefit from one another's involvement in the market instead of competing against each other.
ocean_moist 2y ago
Yeah, almost necessary at a high level (and online), however I play against fish most of the time. I am also 18 and lack connections/capital/time to enter high level games. I would say markets are approx. zero-sum on small time-scales. And low-beta alpha is better sourced from treating the market as zero-sum. Short-term price movements are primarily driven by the redistribution of wealth between market participants rather than by the creation of new fundamental value, making strategic positioning against other traders more effective for generating uncorrelated returns.