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Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown

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Principle VII: Game Theory

Another beautiful addition to the theory of randomness was the development of game theory. This is the mathematical study of uncertainty caused by rational actions of others rather than natural randomness. One early game-theory result is that the most rational action is often to flip a coin. Any decision arrived at through any intellectual process is provably inferior to a random decision. Another result is that knowledge and freedom of action can be harmful. In a so-called truel, a three-person analog of a duel, the most skillful person often has the least chance of winning.

Game theory sent researchers into the laboratory and the world to gather data about how people actually behave, and what the results are. This is one of the most exciting and productive areas of scientific research today. For the first time we have real data to force some rigor on the study of behavior: whether in biology, evolutionary theory, anthropology, psychology, sociology, political theory, or economics. Randomness turns up in all sorts of unexpected ways in modern game theory.

Game theory results are related to the study of risk because traditional economic analysis distinguished sharply between risk, which always reduced expected utility, and freedom of action, which always increased expected utility. That is, if a future event is uncertain, that's bad if some natural process you can't predict or control determines the event, but good if you get to choose the event. Game ...

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