The Market Game is up and running!
While testing it I got some very interesting surprises. The original objective was to show how a level playing field soon becomes asymmetric following the Pareto principle or 80/20 rule. That certainly happens but at different speeds depending on the starting conditions, for example, the larger the wager size in relation to the player’s bankroll the faster he goes bankrupt and the quicker the 80/20 position is established. This brought to mind the Kelly criterion which seeks to establish the ideal bet size. Once only a few players remain with a large bankroll from winnings, the system enters a steady state as it becomes increasingly difficult to bankrupt anyone without increasing the bet size (my demo can’t do that in the middle of a game). Another fast moving starting condition is a large number of players.
While The Market Game does not help with stock picking I think it is instructive for portfolio management, for example for finding the optimum number of stocks to have in the portfolio. I have the gut feeling that the Kelly criterion could be useful for figuring this out. I think it also points out the danger of risky positions but one needs to be very careful how one defines risk.
Try it out and let me know how goes!
The Market Game
If and when I write it up I’ll add a link to the rest of Software Times. I’ve been thinking of adding a second “game,” a trading game, to see how that changes the landscape.
PS: How predictable is random? With this starting position
after the first ten hands a minimum of 15 players are bankrupt! With ten hands played, if every winner is distinct, 15 have not yet won. But having bet $50 ten times, their bankroll is gone. This first winner, after the initial hand, has a bankroll of $1,700 [500 - 50 + (25 * 50)]. It is very unlikely he’ll be out of the game. This is what the Kelly criterion deals with.