You, Games and Markets

A Aparajitha, AS Ramasastri

Description

“Economists, it is said, suffer from ‘physics envy’. Like physicists who model the behaviour of the universe with exactitude through complex mathematical formulations, economists believed that they could model human behaviour with similar exactitude deploying similar complex formulations. Central to this pursuit was the assumption that humans are rational.
But that assumption does not hold. The history of economics is replete with examples of how the discipline has repeatedly been wrong footed in predicting or explaining real world outcomes because a completely rational human being simply does not exist.
This book by Ramasastri and his daughter, Aparajitha, is grounded on that basic understanding. Drawing from their shared interest in probability theory, artificial intelligence, human behaviour and casinos, they focus on how irrational behaviour leads people into flawed decisions in financial markets. Their endeavour is not so much to help the reader play the stock market with greater finesse, but a larger one – of helping the reader understand the roots of irrationality in herself.
That’s a daunting challenge. But Ramasastri and Aparajitha approach the task with remarkable aptitude and enthusiasm pulling together concepts and ideas from a variety of disciplines and varied human experiences”

Sujets

• Economie gestion
• Trading
• Irrationality
• Behavioral economics
• Investment
• Economics
• Opérateur de marché
• Business
• Finance

Informations

• Publié par: Partridge Publishing India
• Date de parution: 02 mai 2023
• Nombre de lectures: 0
• EAN13: 9781543709193
• Langue: English

Extrait

YOU, GAMES AND MARKETS
 
KNOW THYSELF
 
 
AS Ramasastri A Aparajitha
 

 
 
Copyright © 2023 by AS Ramasastri; A Aparajitha.
 
ISBN:
Hardcover
978-1-5437-0921-6

Softcover
978-1-5437-0920-9

eBook
978-1-5437-0919-3
 
 
All rights reserved. No part of this book may be used or reproduced by any means, graphic, electronic, or mechanical, including photocopying, recording, taping or by any information storage retrieval system without the written permission of the author except in the case of brief quotations embodied in critical articles and reviews.
 
Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.
 
 
 
 
 
 
www.partridgepublishing.com/india
Contents
Foreword
Preface
Chapter I: You Are What Your Emotions Are
1. Brain and Rational Behaviour
2. Moods and Emotions
3. Emotions and Emotional Traits
4. Emotional Traits and Personality
5. Traits – Positive and Negative
6. Negative Traits that Matter
7. Can you Escape your Emotions?
8. Caveat
Chapter II: Negative Traits
1. Anger
2. Greed
3. Attachment
4. Pride
5. Envy
6. Fear
7. Pessimism
8. Quixotism
Chapter III: Simulated Games
1. Are Stock Markets Casinos?
2. When you are at a Racecourse
3. At the Roulette Table
4. If you were a farmer
5. Imagine you are an angel
6. To Lend or Not to
7. Be Poker Faced
8. Negative Traits and Behavioural Types
Chapter IV: Quantitative Methods
1. Probability
2. Random Variable
3. Probability Distribution
4. Mean and Standard Deviation
5. Correlation and Regression
6. Random Sampling
7. Time Series and Stochastic Processes
8. Tying Knots
Chapter V: Stock Market Theories
1. Dow and Technical Analysis
2. DuPont and Fundamental Analysis
3. Bachelier and Random Walk Theory
4. Fama and Efficient Markets Hypothesis
5. Sharpe and the Capital Asset Pricing Model
6. Ross and Arbitrage Pricing Theory
7. Keynes and Animal Spirits
8. Nobel Laureates and Behavioural Economics
Chapter VI: Historical Market Events
1. 5Es of Asset Bubble Life Cycle
2. Tulip Mania (1634)
3. Vienna Stock Exchange Crash (1873)
4. Wall Street Crash (1929)
5. Black Monday (1987)
6. Dot-Com Burst (2000)
7. Global Financial Crisis (2008)
8. Crypto Growth
Chapter VII: Men and Machines : Co-Existence
1. Machines March into Markets
2. Automated Trading Systems
3. Artificial Intelligence
4. AI Based Trading Systems
5. AI and Emotions
6. AI and Ethics
7. Can you Beat an AI Based Trader?
8. Looking into the Future
Chapter VIII: Lessons Learnt and Way Forward
Recommended Reading
Foreword
Economists, it is said somewhat derisively, suffer from ‘physics envy’. Like physicists who model the behaviour of the universe with exactitude through complex mathematical formulations, economists believed that they could model human behaviour with similar exactitude deploying similarly complex mathematical formulations. Central to this pursuit was the assumption that humans are rational, forever attempting to maximize their utility.
But that assumption does not hold. The history of economics is replete with examples of how the discipline has repeatedly been wrongfooted in predicting or explaining real world outcomes because a completely rational human being simply does not exist. Far from being cold, calculating rational machines driven entirely by self-interest, humans are – yes, just that – human. They are driven by emotions as Richard Thaler, a Nobel Prize winning economist, demonstrated in his widely acclaimed book ‘Nudge’, and they are driven by psychological biases as Daniel Kahneman, another Nobel Laureate, explains in his justly famous book – ‘Thinking Fast and Slow’.
This book by Ramasastri, a valued colleague of mine when I was in the Reserve Bank of India (2008-13), and his daughter, Aparajitha, is grounded on that basic understanding. Drawing from their shared interest in probability theory, artificial intelligence, human behaviour and casinos, not necessarily in that order, as they are careful to add, they focus on how irrational behaviour leads people into flawed decisions in financial markets. Their endeavour is not so much to help the reader play the stock market with greater finesse, but a larger one – of helping the reader understand the roots of irrationality in herself.
That’s a daunting challenge. But Ramasastri and Aparajitha approach the task with remarkable aptitude and enthusiasm pulling together concepts and ideas from a variety of disciplines and varied human experiences.
From one side, they dive deep into the psychology of emotions explaining how negative traits such as anger, greed and attachment lead our decision making astray. That would have been a scholarly endeavor if also a sterile one. But Ramasastri and Aparajitha make it remarkably engaging by explaining human emotions with examples drawn from a wide canvas stretching across time and space like Vishnusharma’s Panchatantra, Homer’s Iliad, Shakespeare’s Macbeth, Austen’s Pride and Prejudice and Vyasa’s Mahabharata.
From the other side, they explain the ‘Physics of Wall Street’ – quantitative models that have transformed twentieth century finance. I was particularly impressed by how they illustrate both the intuitive and counter intuitive dimensions of probability theory with examples that will surely make this book a useful compendium to any college text book on the subject. Similarly, they show how the celebrated theories and models of a stellar galaxy of scholars such Bachelier, Sharpe, Fama and Ross gave finance an intellectual heft and reshaped financial engineering.
At the heart of this book is the thesis that human behaviour influences financial markets in ways that we barely recognize. The way the book brings together the seemingly disparate expositions from hard and soft sciences to substantiate and explain that central thesis will rank as its defining feature. The storyline draws from historical experiences to show how the world goes from one financial crisis to another because people repeat the same follies as if they never learn anything from the past. History inevitably repeats itself, but contrary to the popular surmise, almost always as a tragedy.
If humans, with a head and a heart, are driven by emotions, can machines, with just a head, do any better? Will the combination of a fallible, irrational human and a cold, calculating machine prove to be optimal? Or will the conflict between the heart of the human and the mind of the machine end in a zero-sum game? These are tantalizing questions with answers all in the realm of speculation. Read this book to get a flavour of what the future might look like.
This book by the father-daughter duo is commendable on many counts – the clarity of its central message, the richness of concepts and ideas from a wide canvas, the engaging writing style with illustrations drawn from a variety of human experiences, its logical structure and the easy flow of the storyline. It’s commendable most of all because Ramasastri and Aparajitha address a topic that is of vital importance.
This book will give you a better understanding of financial markets; more importantly, it will give you a better understanding of yourself.
My best wishes to Ramasastri and Aparajitha for the success of this book and for follow on books in the future taking off from where they finish here.
Duvvuri Subbarao
Governor (2008-13)
Reserve Bank of India
Preface
Motivation
We both have keen interest in probability theory, artificial intelligence, human behaviour and casinos, not necessarily in that order. Interestingly, we find the intersections of our areas of interest with stock markets. It is such common intersections that excited us to write the book You, Games and Markets.
The book is not a manual to make money in stock markets. It is a guide to help you to assess your ability to take rational decisions. According to us, such an ability is very much required in your life always and specifically during your buy and sell decisions in stock markets. You may wonder why anyone would take irrational decisions!
Each human is endowed not only with intelligence to think but also with emotions to feel. Though human brain is capable of taking decisions rationally, human emotions, at times, distort human rationality. Irrational behaviour can lead to errors in judgement and flaws in decisions, which are quite often risky and sometimes even ruinous.
In order to avoid such consequences from irrational decisions, it will be useful for you to understand your basic emotional traits. Self-understanding is the first step towards keeping away from hasty decisions driven by emotions and moving towards rational decisions backed by logic. The theme throughout our book is self-assessment for being better prepared to participate in stock markets. We organized the chapters of the book accordingly.