A Fool’s Challenge
I’ve never looked into trading/investing before, being a quite risk-averse person in general. But when my boss challenged me to a competition, I couldn’t resist. £10 over one year, starting on 1st April (because trying to beat the stock market is foolish indeed).
I would be lying if I tried to refute that, like most maths graduates I expect, I’ve previously considered whether I could make money trading on the stock market. Don’t get me wrong, a career in finance was never going to truly motivate me, but I suspect few wouldn’t want to monetise their intellect to get rich quick. After all, I’m still paying back my student debt from the aforementioned maths degree. If there was easy cash to be made then everyone would be doing it though, and if I cared enough to put the effort in then I probably would have studied economics instead.
Then again, I don’t need to beat the markets, I just need to beat my boss which (with all due respect to him, he’s a great manager) seems feasible. Whilst I have zero knowledge of financial markets, I have studied statistics and have a working knowledge of game theory¹. Perhaps there’s a strategy here that maximises my chance of finishing the year with a greater balance than him? (We agreed the prize for the winner would be the other’s balance, assuming it’s non-negative!)
Given that neither of us has any real expertise on this topic (though I suspect he’s got a bit of experience with stocks and shares) and the inherent risk of trading and investment, it seems that the best strategy is to take the £10 and keep it under my mattress for the next year hoping that he finishes at a loss. Assuming we are rational players then we would both chose this strategy, resulting in a rather boring Nash equilibrium² where we draw. It’s fair to say that we aren’t entirely rational and neither of us will go for this strategy, as we are fools for dedicating time to such a fruitless endeavour. (I’m still in COVID Lockdown and very bored at this point; let’s see how much fun I can have with £10.)
Neither of us can risk any more than the starting £10 plus any derived returns from it; any sort of betting that involves putting a larger amount of money at risk is off the table. From my quick Google search on ‘how to make money trading’, I think this is called trading on the margin with leverage? Given the tragic consequences this has had for some hobbyist traders, it’s firmly out of scope. Trading seems to have become a lot more accessible these days and popularity with millennials like me has increased, driven by easy-to-use apps and media attention over the GameStop saga. Perhaps society is still playing catch up.
I digress. £10, one year, and I assume we’ll share our progress but not our strategy, hence the game-theoretic element: I can adjust my strategy based on how well he appears to be doing. £10 is a pitiful amount in this context of investment, but thanks to the rise of trading apps that allow the purchase of fractional shares³, it appears we won’t be limited to risky penny stocks (which I understand to be really cheap shares in smaller companies that could easily go bust).
So the game’s afoot. Can I use my game theory and stats knowledge to devise a suitable strategy that maximises my chance of winning?
Concepts in this article
- Game Theory is the study of decision making within games played by rational players (players that act in their best interests). John Nash is most commonly associated with the field and won a Nobel Prize in Economics for his work, whose life is depicted in the film, A Beautiful Mind.
- Nash Equilibrium describes a state in a competitive game in which neither player has any incentive to change their strategy, even knowing the other player’s strategy.
- Fractional Shares allow the ownership of a single share in a company to be split amongst multiple investors, each paying just a proportion of the price. This allows for smaller investments than the cost of a single share.
