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Black Friday, Games and the Stock Market

Black Friday, Games and the Stock Market

Black Friday has come and gone.  The massive surge into the shops which was anticipated in much of the media failed to materialise.  Many retail outlets were quieter than a normal Friday.  In contrast, internet shopping went wild.  Amazon had its biggest ever day in the UK, selling over 7 million items.  Argos and John Lewis experienced problems with their websites because of the huge number of visitors.  For the first time ever, online sales are believed to have exceeded £1 billion in a single day.

Experiences such as this raise fundamental questions about the predictability of many social and economic events.  The Office for Budget Responsibility handed George Osborne an extra £27 billion to play with in his Autumn Statement by revising its forecasts through to 2020.  Many commentators have pointed to the large amount of uncertainty which surrounds them.  But these are predictions over a five year horizon.  Even just a week ago, many believed that the shops would be packed on Friday.  The retailers themselves geared up for the crush.  But it did not happen.

It is always possible after an event to rationalise it.     On Black Friday 2014, in an Asda store, shoppers trampled each other and fights broke out as they attempted to grab bargains.  This mayhem was publicised widely.  Looking back surely it is obvious that this is why people went online rather than risk a repeat of last year’s chaos?  In fact, so-called hindsight bias appears to be deeply rooted in our individual psychologies.  Something happens, and we often come to believe that it was inevitable. But this is not what the retailers and the media thought in advance of last Friday.  We conveniently forget that we failed to predict it even the day before.

Approaching last Friday, consumers were essentially playing something called the Minority Game.  You want to go shopping, but not if there will be huge crowds.  If the shops are empty, it is not enjoyable.  Like baby bear’s porridge, you want it just right, not too many, and not too few.  Parisians leaving the city for their annual month off in August face a similar problem.  Giant traffic jams have been experienced at 3am in the morning, as everyone came to the view that the roads would be quiet at that time.  In stock markets, the ideal time to sell is just before the cusp when majority opinion shifts from being bullish to bearish.  You are in exactly the right size of minority.

Two Swiss physicists, Damien Challet and Yi-Cheng Zhang, formalised the structure of the game about ten years ago.   Since then literally thousands of scientific papers have been written about it.  The problem can be stated in words very simply, and it is one with many practical applications.  But even using hair raising maths, it turns out to be fiendishly difficult to solve.  In general, there is no strictly rational way to play.  To succeed you need to adapt your strategy constantly. The overall outcome is highly uncertain, just like Black Friday.

As published in City AM on Wednesday 2nd December

Image: dice another day by topher76 licensed under CC BY 2.0
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The Olympics, traffic in Central London and a bar in Santa Fe

We all know now about the empty roads and deserted shops, all quite contrary to the official announcements before the Games began.  No doubt Transport for London used their massively complicated, expensive models of the transport network to deduce that the system would be under massive strain.

But a deceptively simple game devised in the 1990s about a bar in Santa Fe sheds light on what has happened.  Santa Fe is teeming with high powered researchers, who proliferate in the state of New Mexico. Of a Thursday evening, many of them enjoyed gathering in the El Farol bar.  The problem was, there were lots of them, and the bar was rather small.  If it got too crowded, each scientist would have preferred to stay at home.  But if it was too empty, it was no fun.
Brian Arthur is a highly original British economist who has been based for many years in America.   He realised that the decision of whether to go to the bar or not could be set out as a problem in game theory.  Easy to describe: you need to have a strategy which maximises your chances of being there when El Farol is like Baby Bear’s porridge, not too full, not too empty, but just right.

It turns out that it is incredibly difficult to work out what such a strategy might be.  Swiss scientists Damien Challet and Yi-Cheng Zhang developed the problem into the so-called ‘minority game’.  Literally thousands of high powered maths papers have been written on this.  But no strictly rational way of playing the game has been devised.

But these endeavours have not been useless.  We do know some things about the game.  One thing we know is that if everyone determines the same strategy, regardless of what it is, it is guaranteed to fail.  If you think the bar will be empty, you will go.  But so will everyone else.  And vice versa if you think it will be full.

The effect of all the TfL publicity and Mayoral announcements was to get lots of players – the shoppers, workers and tourists who go into Central London – playing the same strategy.  In other words, they believed it would be heaving, and decided not to go in.

This was certainly reinforced by social network effects.  Decisions were not taken in isolation, but after discussions with work colleagues, friends and neighbours.  This made it even more likely that people would arrive at the same decision.
The lesson for policy makers is that in a networked world, less can be more.  A bit of smart theory can weigh far more than tons and tons of the massive models beloved of bureaucrats the world over.

Published by CityAM on Wednesday 8th August 2012

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