Archive for October, 2012

Games and Finance

game and moneyIs there any relation between games and finance?

For most people the answer to the above question is no. As a matter of fact for most adults, games and finance are near the opposite in term of concept. Finance is a very serious topic as this can involve your life savings and you do not want to play with that, otherwise you could become bankrupt. And many people have recently discovered to their surprise that their safe investments were not as safe as expected. Remember  Madoff among others?

On the other hand when we think about games, kids, toys, fun and entertainment spring to mind. Unless you are a professional Starcraft or poker player, games are not taken too seriously. Games are played during your free time when you want to get away from the boredom or stress of your professional life. So back to the above question, what is the link between finance and games?

In short the answer is probability.

Probability is a branch of mathematics that underlies nearly all aspects of our modern life. It is heavily used in finance as any financial instrument theoretical price depends on the theory of probability; macroeconomics too, as well as the price of any asset. This is to say how important this theory is to our complex civilization. And so many branches of science from physics to archeology use it or use statistics which is the applied version of probability.

Historically probability was invented by Blaise Pascal to solve problems related to games. In as early as 1654 the former was asked by a friend to solve a card game problem, in a nutshell how to share the money when the game is interrupted before the final income. In other words as there is not yet a winner, how to determine the expected value of each player to win the game. That is to say the chance of each one being the winner. And share the money accordingly.

Interestingly all the complicated probability theory as we know it today stemmed from this early work. So it is no understatement to say that games and finance are closely interrelated. Calculating the chance of ruin if you play roulette or the option market is for the most part the same problem.

Some cynics may say that most players in the stock market and options markets are gamblers, and they are not too far from the truth. The only people certain to make money consistently in these markets are the brokers and market-makers. Likewise in the casino the only people who make money day in and day out are the croupiers and dealers.