Economics / The Games People Play

Two books about game theory take a swipe at this field of economics, to varying extents.

Sihot al Torat Hamishakim

(Conversations on Game Theory), by Haim Shapira Kinneret Zmora-Bitan Publishers (Hebrew), 240 pages, NIS 88

Fooled by Randomness:

The Hidden Role of Chance in the Markets and in Life by Nassim Nicholas Taleb Random House, 368 pages, $27

(Hebrew translation by Michal Elan; Yedioth Books / Books in the Attic, 407 pages, NIS 98)

"Conversations on Game Theory" is not a long book, and its 240 pages (including acknowledgements) are light and readable. It offers the basics of game theory to non-professionals and the public at large, and does so in an "enjoyable and entertaining manner," in the author's words. "Fooled by Randomness" is a longer volume, with 330 pages of text and an additional 30-plus pages of notes and appendices. It too is intended for the wider public, and it is informative, and no less enjoyable or entertaining, even if its style is completely different.

Both books deal with topics that overlap on a number of points; both are driven by a desire to expose readers to what lies behind areas of knowledge that have a scientific or sophisticated image and greatly influence our lives, and both skillfully expose widespread failures in the way people think, even the so-called experts among us. The difference between the books is significant, however: Prof. Haim Shapira, author of "Conversations on Game Theory," writes in the voice of someone who has learned to acknowledge several benign shortcomings in his own academic field; Nassim Nicholas Taleb, author of "Fooled by Randomness," comes off as an expert who puts his entire field of study on the line, and discovers that the emperor has no clothes.

Underground writing

Shapira notes at the outset that he wanted his book to depict "situations that will be familiar to all of us, and to present them in a way that goes down easy with any curious reader, sometimes even at the cost of mathematical precision." The book holds up its end of the bargain. It's light, for the most part comprehensible, and even entertaining - if you're one of those who finds jokes about management workshops amusing (not such a small group, to judge from the book's success). It also gets across several important messages without needing to rely on advanced mathematics. The book seems to satisfy the needs of those who want to know the truth about game theory without having to work too hard. The pleasant style employed by the writer is supplemented by Dani Kerman's amusing illustrations.

But Shapira falls short when it comes to keeping his promise to his readers to use day-to-day situations as a way of getting his points across. If any of the situations he describes do sound familiar, it's just because game theorists have already brought them to public attention, through forums such as team-building sessions and leadership and managerial workshops.

Game theory is concerned with the way decisions are made in situations ("games") in which more than one participant is involved. It analyzes the various possibilities offered by the situation, assigns each of them a mathematical value, and proposes solutions that can be expressed numerically. When Shapira describes the "games" that game theory analyzes by means of its models, he characterizes some of them (for example, the two-envelope paradox and the game involving a rich man dying) as strange, as if he is winking at the reader and saying, "of course, these things don't happen in real life." But he abstains from discussing what he thinks the implications of this are for the significance of game theory and its validity and value in real-life decision making.

With all his subversiveness, it still seems that Shapira views every event as a game, whether it is described as a game-theory model or whether it is truly happening - to people who are experiencing it, rather than researching it.

Even when Shapira seems to be mocking the assumptions of game theory, he doesn't offer any genuine criticism of its cornerstone principle: the assumption that the players are rational, meaning that they are attempting to maximize profits at all times. Shapira acknowledges the problematic nature of this assumption, but goes along with it nonetheless, arriving at some bizarre conclusions. Take the situation in which two men are arguing over which one of them is wearing the nicer necktie. A third person, who is called in to judge the neckwear, proposes that after he decides who has the nicer tie, that person has to give it to the other man. The paradox that baffles the author is: "How is it possible for each contestant to claim that he has the advantage?"

But if we put game theory aside for a moment, the answer is surprisingly simple. While it's true that according to game theory, each of the men stands to lose a tie valued at X shekels, each one stands to gain something that will satisfy him: Either he wins a tie or he receives a compliment on his good taste. That is why both feel that the advantage is on their side, and there really is no paradox.

That episode captures in a nutshell the most conspicuous weakness of game theory, which Shapira, in spite of all his witticisms, does not really get at. He does come close to doing so, though - especially in a section on mathematics versus psychology, part of a chapter that deals with the ultimatum game, in which he concedes that people do not make decisions solely on the basis of immediate financial gain.

Apparently, psychology - or rather, the way people perceive the offer extended to them (as in the ultimatum game), combined with their knowledge of how much the maker of the offer stands to gain - has a decisive role in their decisions. This finding, which as Shapira testifies, turns up repeatedly in large experimental groups and in a variety of cultures, suggests that the basic assumptions made by game theory are at the least extremely problematic, and certainly don't apply to the majority of people. Shapira doesn't spell out this conclusion; he leaves it to the reader to draw it on his own. Elsewhere in the book as well, he leaves readers to figure out what the bottom line is. Is this simply out of respect for the reader's intelligence, or do such conclusions question game theory's presumption in proposing scientific strategies for decision making in every realm of life? Shapira's book swings between the wish to provide a sober view of game theory, and perhaps even diminish its lofty standing in the public mind, and an apparent reluctance to put it all on the line. Even when he admits that some of the situations used in game theory have little foundation in real life, he doesn't follow through to the obvious conclusion: The king may not be completely naked, but he's only scantily clad.

Life as a game

The book's main weakness is its superficiality. Even after acknowledging the role played by psychology, or in simpler terms, the role of plain human motives in decision making, Shapira nonetheless persists in seeing all real-life situations as if they were games. The limitations of such a viewpoint are evident in the "charge or linger" dilemma that Plato relates in the name of Socrates: In the midst of combat, a soldier must decide whether to charge forward with his comrades or to hang back, since victory is apparently not dependent on his actions alone.

Shapira notes that Socrates was unsure of how to solve this dilemma. And for him, that's the end of the story: There is no solution. And indeed, as long as one is relying on the tools of game theory for an answer, none is to be found. In the real world (in which Plato himself, who viewed this as a moral issue, lived), the question of whether or not to attack is not part of a game. It is social-cultural in nature, and its solution is defined by norms and laws. There are cultural traditions and there are lawmakers - whether a king or tyrant, a government or parliament - that set down rules for the right behavior in battle and specify the consequences for failing to follow them (as in cases of treason, flight from the battlefield and the like).

Even Immanuel Kant turns up in Shapira's workshops, though he had no idea that the question that occupied him - what is the moral act? - was little more than a solution to a dilemma from game theory.

In the book's later chapters, Shapira does connect to the real world. He explains how one can tell lies with statistics, why it is that all games of chance are nothing but trickery, and what the most common mistakes in reasoning are that we all make. It is worthwhile to pay attention to what he says. And if you still insist on playing the lottery after having read his book, at least you need not spend time deliberating on which numbers to pick.

Sharpness of a saber

"Fooled by Randomness" is also a book that removes the disguise from seemingly scientific disciplines that overflow with numbers and formulas, and that command respect by virtue of that guise. But here the subversiveness is open for all to see, refreshing as a gust of cold wind and extremely funny. Taleb, an American of Lebanese origin, comes from a well-off Greek Orthodox family that fled from Beirut during the civil war that broke out there in the 1970s. Taleb studied in the United States and France; he holds a doctorate from the University of Paris and an MBA from the Wharton School, and is a one-time trader at respectable investment houses and other financial institutions.

In this book, Taleb has taken upon himself the task of proving the extent to which random events play a role in our lives, especially in financial markets - the area of his professional expertise.

According to Taleb, it really doesn't matter how talented or hard-working we are, or how strong our work ethic is. In the vast majority of cases, he says, the results of our actions bear only a slight connection, if any, to what we think of as talent or earnestness. During his years as a trader, Taleb drew conclusions that challenge the deeply held assumptions of the financial world. And since he knows philosophy and history as well as he does probability and mathematical finance, those conclusions led him to write what has become a cult book, which possesses all the sharpness of a saber.

The book's strange structure nonchalantly combines true stories of the working lives of stock-market traders - stories as funny as they are nearly tragic - with analyses that shatter the conventional wisdom about the workings of that world. Each chapter of the book's three sections deals with a number of different subjects, and though this may sound complicated, the book is anything but. On the contrary, even the Hebrew version is amazingly fluent and readable - thanks in no small part to the translation of Michal Elan, who skillfully reflects the free-wheeling style of the author.

In spite of the division into multiple sections, Taleb manages to spin a conceptually complete theory. First he introduces his view of the power of randomness. This is based on an idea taken from the philosophy of German rationalist philosopher Gottfried Wilhelm Leibniz, who believed that the world we live in is only one of an infinite number of possible worlds. According to Taleb, it is only by chance that these alternate realities do not come to pass, though we nevertheless neglect to take them into account.

Taleb also exposes all of the random biases we are prone to. One is the survival bias: It is our tendency to be impressed by a person's successful feat, without checking out the odds of success in that particular task or the part played by chance - as demonstrated in the example of numerous monkeys typing texts. Another bias stems from our inherent difficulty in comprehending probability, which is rooted in human beings having evolved in an environment that was short on information and meager on alternatives. He also suggests how to live with chronic randomness, in a section called "Wax in my Ears" - to my taste a weaker part of the book, which recycles stuff already covered.

The best way to describe the lively, wild wind that blows through every page in the book is to do what the author does: whip out some clever lines with the ease with which a magician pulls rabbits out of a hat.

Of Nero Tulip (Taleb's better-mannered alter ego), a trader who settles for modest earnings because of his obsessive fear of risk, the author writes: "Nero harbors a deep suspicion that the stock market is some form of an investment scam, and cannot bring himself to own a stock." He places no faith in the profits that can be made during a particular period, trusting only in the test of survival over time, a rare trait among traders. According to Taleb, all those amazingly successful traders who rack up millions during a specific period and are regarded as financial wizards end up crashing, and he can prove it.

About Hegel, "the father of all pseudo-thinkers," Taleb says he "writes a jargon that is meaningless outside of a chic Left Bank Parisian cafe." And the "nerdy types at the International Monetary Fund," he adds, "had been taken for a ride by the Russian government, which cheated on its account. Let us remember that economists are evaluated on how intelligent they sound, not on a scientific measure of their knowledge of reality."

Perhaps this sounds like little more than a string of wisecracks, but Taleb has in fact assembled a complex structure that shows how his seemingly humorous descriptions apply to real life.

Swan song

Taleb's perception of reality can be summed up in the notion of the black swan - a rare event whose probability is not calculated because of its rarity, but which nonetheless happens (and when it does, there is always an explanation forthcoming for the failure to anticipate it). He demonstrates how time after time the wise men of economics and finance ignore the existence of the swan and fail in their naive empiricism - that is, they make do with the data at hand and completely ignore invisible histories, which only by chance have not been actualized.

"We are trained to take advantage of the information that is lying in front of our eyes, ignoring the information that we do not see," Taleb writes. Hence, all of the analyses that are intended to explain why a particular strategy worked, are futile. Analyses of the performances of economic policy and the financial markets are always retrospective, following what is conceived of as a successful event. There's no point in mathematical models for the market that are based only on what has happened and ignore what could have happened.

As an example, Taleb looks at the fall of financial wizard Victor Niederhoffer, which, he writes, took place because Niederhoffer assumed that "what he saw in the past was an exact generalization of what could happen in the future." Here he reminds us that, for all the fashionable enthusiasm for game theory, "in reality, there are no rules and there are no closed and symmetrical regulations, the way there are in games."

Taleb has a low opinion not only of financial experts and stock market prophets, but also of journalists, who are constantly dispensing endless amounts of information - most of it toxic noise lacking in any real content. In his working days as a trader, Taleb says, he took care to ignore the newspapers and never watched updates from the financial markets, because nothing meaningful can be drawn from minute-to-minute data flow. On the other hand, he has great admiration for the researchers Amos Tversky and Daniel Kahneman, for their skillfully executed studies that have shown us humans to be far less rational than we believe ourselves to be.

Taleb comes off as rather pleased with himself, even as he admits to a variety of weaknesses, especially that of being overly emotional. He knows that he, like all of us, is flawed, and is not immune to the damage that randomness can inflict; his only defense lies in his awareness of its existence and its great power. Bearing in mind his personal success as a trader and as a senior manager in major financial institutions, it seems he is being overly modest. And yet, the book would have benefited from some pruning of the descriptions of the author's lifestyle, of which he is so proud.

For all the pleasure I derived from this book, I can't help wondering: How is it that even such a knowledgeable and sharp writer as Taleb accepts unquestioningly the definition of rationality, narrow to the point of absurdity, imposed on us by the scientists of economics and game theory ("pseudo-scientists," in his opinion)? After all, it is only in light of this limited rationality that Taleb considers us all flawed, rather than simply human. Plain wisdom, rationality in its old philosophical sense, does not seem to count. Taleb, who is otherwise so self-aware, evidently does not recognize in himself the fundamental wisdom of the kind that led him to his clever and original insights about his, and our, world.

Addie Marcuze-Haas is a translator of nonfiction and an author of biology textbooks.