Games and Strategies

The main objective of business and financial strategies is to maintain a desired level of financial performance. The challenge is to achieve this performance in a consistent way while minimizing volatility of returns. Consistency requires the ability to anticipate the action of competitors and financial markets. At the same time it is important to balance return and risk as business and financial conditions change. How can this be achieved? What are the main parameters that drive business and financial strategies? Is there a general framework to guide the strategist? How are your instincts?

There is no telling where your business or portfolio will end up. Look for a simple formula and you will discover that none exists. If it did, everyone would be running a successful business and be rich. But certain guidelines have proven themselves to be the soundest over time.

A common visualization in developing business and financial strategies is to think of them as a game. Every individual plays against all the other individuals or against the markets. A strategy can be visualized as a series of moves to win the game against competitors or other investors.

Game theory was developed in the 1940's to help the military design and execute successful strategies. War poses the problem of maximizing return - that is winning at the lowest cost without knowing exactly what the enemy, who is also trying to win, is likely to do. This procedure parallels that of a successful business decision-maker or financial strategist. Learn the enemy's strengths, weaknesses, and approximate position. Then assign odds on their next move. On the basis of these odds, establish the best future moves you need to make in order to win.

Once we know all our available alternatives and their likely payoff, we determine the best sequence of moves to lead us to victory. After our move, the enemy's response might send us back to the drawing board to establish the next set of strategies and so on. Business and financial strategies face similar problems: (1) No one knows precisely what the markets - the enemy - will do next. (2) The odds of success and the size of the returns can only be guessed. (3) Strategies depend on the required returns, the perceived risk, and the acceptance of a personal risk-level to play the game.

The content of this book could be considered as one set of rules to play the game. Other participants - that is, investors - may have a different understanding of how things work. As a result, they play the game in a different way. But one thing is sure, the more knowledge the player has about the rules of the game, the more likely he is going to win.

(From my book Profiting in Bull or Bear Markets).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

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