While fundamental value—an inexorable tide that pulls on the price of markets and currencies over longer-term time horizons—is still necessary as an investment tool, it’s no longer sufficient.

What we need, in addition, is an understanding of the macro developments that can drive price either toward or away from fundamental value in the short to medium term.

The challenge is that the complexity of macro developments in a global context typically exceeds what the human mind can process. To understand these developments, an analytical paradigm is necessary—and the one we use is game theory.

Game theory provides a way for us to better organize and process the vast amount of information that affects global economies and markets.

Game theory is a set of principles for scrutinizing the sequential, strategic interactions of multiple agents—the parties at the bargaining table in the conflict in the Middle East, the U.S. debt-ceiling negotiations, and the eurozone crisis, for example. These parties act in their best interests and respond to other parties’ actions via cooperation and conflict.

Consider the eurozone crisis that has evolved over the past couple of years. Coming into 2015, each of the 17 eurozone countries had individual objectives, some overlapping with other countries’ objectives, as the chart below illustrates. These objectives evolve as the situation progresses and the players’ interests change, because every move undertaken changes the payoff and influences other players’ actions.

Singer-Game-Theory-Post 1-Eurozone-Objectives

The outcomes of these strategic interactions depend on players’ objectives (shaped by individual cultural environments and economic incentives, as shown above), dimensions of net influence (the ability to dominate the others parties based on current conditions), and modes of action (threats as potential punishment for failure to cooperate, promises of potential reward for cooperation, and passivity).

What does this have to do with investing? Game theory provides a way for us to better organize and process the vast amount of information that affects global economies and markets. It provides a context within which we can fill knowledge gaps with independent, seasoned judgment in order to exploit uncertainty.

But I’ll discuss the application of game theory to investing more in a future post, after I go into more detail about dimensions of net influence and modes of action, and walk through an easy-to-understand game theater using our old friends Rocky & Bullwinkle.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

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Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
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