Saturday, January 14, 2006

Game Theory vs Chess - Energy Speculations

Game Theory is about optimizing outcomes, Chess about winning.

Yes - that is simplistic.

To see the two play out compare Russia and the Ukrainian Gas pipe line game as opposed to the USA and Asia energy relationship.

Any energy speculation you make should take into account not just player's size, but player's tactics.

That of course is the problem. The relationships are too complex and fluid, and too open to non-linear shocks, to predict. An
investor that relies on expert analysis will be surprised, as will their adviser.

Speculate instead. Take a solid educated guess with a small part of your funds - then limit losses - and let profits run.

Your first goal is to survive, then to profit.

You can't win if you don't play.
You can't play if you go broke.

There is a balance, your portfolio size and risk profile will help you determine your commitment level. Risk as small an amount in correlated investments as will yield a meaningful result.

The headline
game theory vs chess, was a bit of a red herring. That is the point, in life you never know what is coming next.

The key is that whatever tools you use to pick your investment,
they will fail.

How you handle failures of analysis determine if you will be around for success.



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