This is a story about a Mathematics and an Economics professor who use game theory to beat the stock market. The university's endowment fund, having lost significant amounts in the market, is desperate to turn around the situation and in a brain-storming session with some of the professors, the idea of using the university's new computers and the new-found discipline of Game Theory takes shape and is successfully implemented (were the world so simple!). The story comes across as a cavalier romp but aside from the simplification necessary to fit the story in a few pages, is very cleanly done. The author devotes a couple of pages to explain game theory, including a toy example of a two-player, 3-by-3 payoff grid. The explanation of the toy example is very good and its translation into a stock-market problem, though glossed over, seems plausible (esp. in 1949). I found it remarkable that the author took the trouble to explain that at one point, the strategy starts losing money as the market wises up and starts using the same counter-techniques - a hallmark of the "Efficient Markets" theory popularized after the 70s. There is speculation at the end of the story about how game theory deployed with high-tech surveillance methods can be used to win at the casino, again a nice touch. There is a final implicit challenge to the reader to figure out one particular feature of the 3-by-3 grid example. A great example of mathfiction.
Some of my favorite lines:
|(quoted from The Finan-seer)|
"A mathematician once claimed that God was a mathematician. Let me remind you that the converse of that proposition is not true!"
"Why, I believe they analyzed the past performance of the market by applying the theory of Fourier Series and then extrapolated the result. The results were rather unfortunate.", he added wryly.
"If the matrix is M x N, there is an M+N-fold infinity of combinations to be tried" (quite bogus and tongue-in-cheek). "but of course, we have to worry only about our end. That reduces to an M-fold infinity, which should help a lot"
Published in Astounding Science Fiction, Oct 1949.
(BTW: In reading the description above, it may be useful to know something about Vijay Fafat. In addition to being talented at finding old, lost gems of mathematical fiction, he is the vice president of an investment bank. So, he knows something about the subject he's discussing here.)