tradingxyz's  Instablog

In Mr. Douglas R. Hofstadter’s book, Metamagical Themas: Questing for the Essence of Mind and Pattern, he discusses a computer competition that was held by Mr. Robert Axelrod. Mr. Axelrod held this competition in 1979. He invited professional game theorists and people who were interested in the Prisoner’s Dilemma to a computer program competition. Various computer programs were programmed to compete against each other in an iterated series of Prisoner’s Dilemma situations. The winner was a program called TIT-FOR-TAT, written by Anatol Rapoport.

Who cares? Well… the philosophical implications of this program winning a competition of this sort is extremely interesting. First, TIT-FOR-TAT was a simple program. It had just a few lines of code. It competed against other programs that were more complex and with more lines of code. Second, the strategy it employed was the following:

Cooperate on Move 1;
Thereafter, do whatever the other player did the previous move.

Mr. Hofstadter states that two key strategies came about from the first tournament. “The lesson of the first tournament seems to have been that it is important to be nice…and forgiving…” Hmmm…A second tournament was held and once again TIT-FOR-TAT won. Mr. Hofstadter states, “the majority of participants in the second tournament really had not grasped the central lesson of the first tournament: the importance of being willing to initiate and reciprocate cooperation.” One other interesting outcome of the second tournament was that of the 15 top strategies, only one was not nice, and of the bottom fifteen strategies, only one was nice!

A third key lesson that was learned from the second tournament was that of provocability-if your counterpart defects and “screws you”, get mad quickly, and retaliate. Mr. Hofstadter says, “Be nice, provocable, and forgiving.”

Mr. Axelrod felt that strategies that do well in a wide variety of environments are robust. He also wrote, “TIT-FOR-TAT won the tournament, not by beating the other player, but by eliciting behavior from the other player which allowed both to do well.” Cooperation and win-win situations are preferable in our society. TIT-FOR-TAT’s wins also teach us to keep it simple, be nice, provocable, and forgiving, and maybe we too will succeed in our lives. Ahhh…philosophy, we Greeks just can’t seem to get enough of it.

Lastly, I cannot ignore Mr. Axelrod’s comment that strategies that succeed in a variety of conditions are robust. Well, I do not know about my trading models being nice, or provocable, or forgiving in the market, but I do know that they are robust--they better be. I also know this; adopting a TIT-FOR-TAT strategy in our lives is a good idea.

Disclosure: "no positions"