The adventures of Rocky & Bullwinkle, as played out in the Cold War-era (1959–1964) television cartoon and reprised in film in 2000, illustrate many of the principles of game theory, which is applicable to investing.

So let’s draw on the characters from the show for a fictitious example. Meet hapless American heroes Rocky J. Squirrel and Bullwinkle J. Moose, and Russian-like spies, the fiendish but inept Boris Badenov and Natasha Fatale.

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

Initial Conditions

Boris and Natasha, seeking a $1 million ransom, have announced the presence of a cleverly hidden bomb in Frostbite Falls, Minn., home of Rocky and Bullwinkle. In negotiating with Boris and Natasha, Rocky and Bullwinkle’s objective is to locate the bomb before it explodes. Boris and Natasha’s objective is to be paid the ransom before they disclose the bomb’s location.

Dimensions of Net Influence

After the bomb is hidden, it is Rocky and Bullwinkle’s move. They decide to barge into Boris and Natasha’s Pottsylvania home as a means of learning the bomb’s location. Bullwinkle suggests a brutal pounding with fluffy pillows until there’s a confession. Rocky is not convinced, opining that they would have more power if they use sticks.

Rocky is correct. In this negotiation, Rocky and Bullwinkle’s initial bargaining power is critical. As I’ve explained previously, multiplayer game analysis benefits from recognizing the dimensions of net influence that each player can use to exert control over other players by imparting potency to negotiating strategies. We assess four: endowment power, coalition power, risk tolerance, and salience.

  • Endowment power. This is an initial resource base. Rocky and Bullwinkle have sticks.
  • Coalition power. This is the ability to form and alter coalitions to augment the effectiveness of a negotiating strategy. Rocky and Bullwinkle are partners, but so are Boris and Natasha.
  • Risk tolerance. This is the willingness to take collateral risk of large magnitude or to have negotiations break down without resolution. Rocky and Bullwinkle do not have much risk tolerance they can leverage.
  • Salience. This is how important the negotiation is to each player. Rocky and Bullwinkle are fully engaged in the negotiation, given the bomb threat in their hometown.

Modes of Action

Our Frostbite Falls bomb confessional can be vastly altered via some savvy modes of action.

Boris and Natasha need a powerful reason to confess the location of the bomb, but Rocky and Bullwinkle threatening Boris and Natasha with sticks wouldn’t be effective. Boris and Natasha would refuse to reveal the location because they would know that Rocky and Bullwinkle couldn’t go so far as to kill their nemeses. That would destroy the only knowledge of the bomb’s location.

Thinking ahead, Rocky and Bullwinkle improve the threat’s credibility by hiring a vicious thug. Rocky and Bullwinkle head into the house and tell Boris and Natasha that their hired help will extract the bomb’s location and has been told to do “whatever it takes.” They remind Boris and Natasha of his horrendous reputation for “sloppy” confessions.

Rocky and Bullwinkle then depart for lunch at a diner down the road, planning to return in one hour to learn the result: Either Boris and Natasha will be dead or they will have confessed.

Leveraging the Dimensions of Net Influence

At this point, Rocky and Bullwinkle have leveraged four dimensions of influence and made a credible communication to Boris and Natasha.

Rocky and Bullwinkle have demonstrated tremendous risk tolerance by walking away without a deal in hand.

  • Their endowment power has increased with the acquisition of sticks in addition to fluffy pillows.
  • Rocky and Bullwinkle have enlisted the partnership of a thug, thus expanding their coalition—and a hired thug is significantly more fear-provoking than sticks.
  • Rocky and Bullwinkle have demonstrated tremendous risk tolerance by walking away without a deal in hand, showing that they can tolerate an outcome that does not include disclosure of the bomb’s location.
  • The negotiation is very important to Rocky and Bullwinkle, because they risk death and the destruction of Frostbite Falls. It’s less important to Boris and Natasha, because they risk only the ransom money.

Enhancing Credibility

Perhaps even more powerfully, Rocky and Bullwinkle have employed several modes of action that enhance the credibility of their threat:

  • With Rocky and Bullwinkle’s exit, communication is severed between Rocky and Bullwinkle and Boris and Natasha, leaving Boris and Natasha with no negotiating alternative.
  • The vicious thug has a reputation for “sloppy” confessions; Boris and Natasha have no desire to experience his wrath.
  • The thug has been mandated with negotiating power, albeit with almost unlimited leeway.

Rocky and Bullwinkle can further enhance their threat by adding the element of brinkmanship: Rocky and Bullwinkle could move Boris and Natasha to a warehouse in Frostbite Falls. Boris and Natasha would be unaware of when the bomb would explode, but would know that they are exposed to its devastation.

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. I’ll further discuss the application of game theory to investing in a future post.

 

Characters and character names associated with The Rocky & Bullwinkle show are trademarked by DreamWorks Classics.

 

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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.

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