Prisoners of Reason

PrisonersofReason

 

In 2011 when I began my PhD studies at Australia’s Monash University, Dr Andy Butfoy and I had a conversation about John Nash Jr, Thomas Schelling, the RAND think tank, and game theory. I had also recently re-watched the Adam Curtis documentary The Trap (2007) on how Nash’s insights influenced corporate negotiators and labour unions.

 

My first task for Andy was to reconstruct the history and prehistory of strategic culture theory-building, I soon found the parallel work of Jack Snyder, Colin S. Gray, and Ken Booth for RAND, the Hudson Institute, and US war colleges. It became clear that Nash and Schelling’s game theory was a rival research program to strategic culture and also to rational choice theory which Snyder adopted in later research.

 

Now, MIT’s S.M. Amadae has given us Prisoners of Reason: Game Theory and the Neoliberal Economy (Cambridge: Cambridge University Press, 2016) – a well documented history of how game theory’s emphasis on strategic rationality influenced research and policymaking in nuclear strategy, economics, sociobiology, and the environment.

 

Amadae contends – as Curtis also did in The Trap – that noncooperative game theory and coercive bargaining gave economic and political elites the leverage to dominate others. The result is a highly competitive society in which brinkmanship and rentier extraction outflanks more cooperative solutions: winner-takes-all.

 

I’ll likely cite Amadae in Chapter 1 of my thesis.

Roy Christopher’s Summer Reading List 2015 + Bonus Material

I have some book suggestions in Disinformation alumnus Roy Christopher’s Summer Reading List 2015.

 

The emergent theme in my list this year is: the wealth extraction strategies of oligarchical elites and how to Become them.

 

Here is some bonus material I wrote that you might find useful:

 

Lasse Heje Pedersen Efficiently Inefficient: How Smart Money Invests & Market Prices Are Determined (Princeton University Press, 2015). Lasse Heje Pederson is the John A. Paulson Professor of Finance and Alternative Investments at the New York University Stern School of Business. Perdersen’s “efficiently inefficient” theory of financial markets focuses on active investors who have a comparative advantage. This book examines six economically motivated investment styles and eight hedge fund strategies. It contains one of the best descriptions I have read of how active management works. Pedersen also interviews influential hedge fund managers and investment managers including James Chanos, Cliff Asness, George Soros, Myron Scholes, Ken Griffin, and John A. Paulson. For a history of hedge funds see Sebastian Mallaby’s More Money Than God: Hedge Funds and the Making of a New Elite (Bloomsbury, 2010).

 

Han Smit and Thras Moraitis Playing At Acquisitions: Behavioral Option Games (Princeton University Press, 2015). Han Smit is a Professor in the Faculty of Economics at the Erasmus University Rotterdam. Thras Moraitis was Group Head of Strategy and Corporate Affairs at Xstrata. Playing At Acquisitions offers a synthesis of three business strategy methodologies: behavioural economics, game theory, and real options. An in-depth case study on the company Xstrata is also provided. Smit and Moraitis provide a personal synthesis that will enable you to perceive your own cognitive biases, to understand others, and to make more effective decisions under uncertainty. For a conceptual understanding of business strategy see J.C. Spenders Business Strategy: Managing Uncertainty, Opportunity, and Enterprise (Oxford University Press, 2014).

 

Lauren A Rivera Pedigree: How Elite Students Get Elite Jobs (Princeton University Press, 2015). Lauren Rivera is Associate Professor of Management & Organizations at Northwestern University’s Kellogg School of Management. Pedigreefollows in the footsteps of Vilfredo Pareto and Gaetano Mosca in examining how the processes of elite reproduction and social stratification occur in elite firms who hire students from elite schools into entry-level jobs. Rivera uses interviews and participant observation to discover how employers use a range of filtering mechanisms to reproduce elites in a way that is reminiscent of ancestral heritage and cultural transmission. This book also offers novel insights on the sociological study of contemporary elites and elite circulation. For a micro-study on elites, non-elites and economic stratification see Robert D. Putnam’s Our Kids: The American Dream in Crisis (Simon & Schuster, 2015).

 

Karen Dawisha Putin’s Kleptocracy: Who Owns Russia? (Simon & Schuster, 2014). Karen Dawisha is the Director of the Havighurst Center for Russian and Post-Soviet Studies at Miami University. Putin’s Kleptocracy was originally under contract at Cambridge University Press before potential libel concerns led to Simon & Schuster publishing the book. Dawisha uses archival, internet, interview, and other sources to show how Putin rose to power and how he and a small oligarchical elite succeeded in extracting economic wealth from post-Soviet Russia. Dawisha’s research informed the PBS Frontline documentary Putin’s Way (13th January 2015). Putin’s success at wealth extraction can be compared with Thor Bjorgolfsson’s Billions to Bust – and Back (Profile Books 2014) and Bill Browder’s Red Notice (Simon & Schuster, 2015) in which self-styled ‘adventure capitalists’ and emerging market financiers were not so lucky. On Putin’s use of sociological propaganda to restructure post-Soviet Russia see Peter Pomerantsev’s Nothing Is True And Everything Is Possible (PublicAffairs, 2014) and Jason Stanley’s How Propaganda Works (Princeton University Press, 2015).

The Toronto-Dominion Centre Working

2:30pm – 3:30pm, 30th March 2014

Toronto-Dominion Centre and Bay St financial district, Toronto, Canada

 

Preparation material: Francis James Chan’s The Prop Trader’s Chronicles: Short-Term Proprietary Trading Strategies for Both Bull and Bear Markets (Hoboken, NJ: John Wiley & Sons, 2013).

 

Aims:

 

(i) Understand the geography of Toronto’s financial district.

(ii) Make a psychological connection to Toronto’s bank prop traders.

 

Results:

 

Chan’s book on intraday trading at a Toronto-based proprietary trading firm alludes to inter-firm competition amongst Bay St trading firms. On arrival in Bay St it became clear that Canada’s five major banks — Bank of Montreal, Scotiabank, the Canadian Imperial Bank of Commerce, the Toronto-Dominion Bank, and the Royal Bank of Canada — dominate the area.

 

The dominance of bank proprietary trading desks explains several aspects that Chan had omitted from his description of intraday trading strategies. Chan and others relied on contracts for difference without overnight holdings. They attempted to understand the order flow of market microstructure using Level II quotes from the NYSE and NASDAQ exchanges rather than technical analysis charts. In game theory terms this was Chan’s attempt to use the best available dominated strategies in a predator-prey ecosystem that the banks dominated.

 

The Toronto-Dominion Centre evokes this institutional banking power in Ludwig van der Rohe’s modernist, international architecture. The TD Bank Pavilion, TD North, and TD West buildings impose themselves on the surrounding area. Their tenants include banking, financial services, investment banking, investment brokerage, and private equity firms.

 

On 11th October 2011, I had visited the Tokyo Stock Exchange and formally began a personal research program “to develop a private, low-key, personal vehicle for long-term self-sufficiency.” The Toronto Stock Exchange was closed so I was unable to repeat the experience. Instead, I stood in the TD Bank Pavilion and grasped the essence of institutional banking power evoked in Adam Smith’s satirical book The Money Game (London: Michael Joseph, 1968).

 

Later that afternoon I visited the Toronto Eaton Centre and the Indigo Books & Music store. Indigo’s business and investment book section was a mix of inspirational biographies; retail investor primers; and technical analysis books. Much of this is outdated information from an institutional banking perspective which relies on non-public trade secrets. I bought a paperback copy of Nassim Nicholas Taleb’s Antifragile: Things That Gain From Disorder (New York: Penguin, 2012) as a reminder of the tacit knowledge that a trader may create through personal experience, research, and reflection.

 

The next day I read the new Michael Lewis book Flash Boys: A Wall Street Revolt (New York: W.W. Norton & Co., 2014) which features former Royal Bank of Canada trader Brad Katsuyama – founder of the IEX Group dark pool – and critic of high-frequency trading. Lewis describes RBC as a sleepy backwater compared to Wall Street but this wasn’t my sense when walking past the RBC Centre in Wellington Street West, Toronto.

 

Several days later I learned of a new University of Toronto study (PDF) on how retail traders and high-frequency traders interacted on the Toronto Stock Exchange in 2012. The study felt like a research counterpoint to the Lewis book. The study found that retail investors largely benefited from the market microstructure of high-frequency trading firms.

 

I resolved to do two things over the next five years:

 

1. To develop a greater awareness of how bank proprietary trading desks affect market microstructure using dominant trading strategies in a predator-prey ecosystem.

 

2. To continue to develop a personal knowledge base and decision heuristics akin to Nassim Nicholas Taleb’s published work.

Kim Jong-il Redux

Nuclear proliferation expert Fred Kaplan and other analysts are writing about North Korea’s third missile test launch and Kim Jong-il. Here’s the Masters research thesis I wrote in 2006 on Jong-il’s nuclear program viewed through Herman Kahn‘s early work on game theory, threat scenarios and Cold War era nuclear warfare. I finished it just as North Korea made its second missile test launch on 4th July 2006.

Frost/Nixon (2008) & Negotiation Games

Ron Howard’s film adaptation of Frost/Nixon (2008) adopts a thriller format in contrast with the Melbourne Theatre Company’s stage production which I saw several months ago.  Salvatore Totino’s cinematography turns David Frost‘s interview into a claustrophobic tit for tat whilst editors Daniel P. Hanley and Mike Hill linger on the emotional aftermath of Richard Nixon‘s elicited, emotional self-disclosure.

For me the MTC’s version suffered from a first act which established the interview’s circumstances, obscured the dual track negotiations between Frost and Nixon’s advisers, and veered into comedy, before ratcheting up the second act.  Howard avoids this dilemma through taut pacing that has a semi-documentary feel heightened when the characters deliver their monologues straight to the camera.

The cast needs to be stellar for this ensemble film and it delivers.  Frank Langella’s Nixon is a self-tortured leader with feet of clay; I have to now revisit Anthony Hopkins’ portrayal in Oliver Stone’s Nixon (1995) for a comparison.  Michael Sheen’s Frost adopts a chutzpah mask which hides a risk-taking gambit to avoid career demise and the compromises made to financiers.  Kevin Bacon’s Jack Brennan is prepared to take the flak for Nixon.  Sam Rockwell’s James Reston Jr. evokes how research can become an all-consuming quest when your beliefs and passions are on the line, deftly counterpointed by Oliver Platt’s Bob Zelnick who zigs and zags between self-depracating humour and conscientious objector angst.  Matthew Macfayden’s John Birt updates the role he played in Spooks (aka MI5) as a nuanced political operator who must counterbalance Frost’s chutzpah and the resistance it creates for Reston Jr. and Zelnick with keeping the team together, and getting the interview planning, negotiations and logistics done.  Rebecca Hall’s Caroline Cushing and Toby Jones’ Swifty Lazar provide comic relief from the tension and function to advance the film’s plot points.  Langella gets the spotlight for his Nixon portrayal yet the rest of the cast are vital because the plot needs everyone to be a coherent whole.

Playwright and scriptwriter Peter Morgan‘s previous films have explored weighty themes: self-willed blindness to the dark side of charismatic leadership in The Last King of Scotland (2006) and leadership judgment during crisis-driven events in The Queen (2006).  Set after Watergate and Nixon’s presidential pardon, Frost/Nixon explores the commitment costs for a research group that sets out to achieve public justice and the ploys in a complex multi-party negotiation.  There’s far more beyond the heart-to-heart phone call between Nixon and Frost, and Nixon’s final self-disclosure, just as there was more to Oliver Stone’s Wall Street (1987) than Gordon Gecko’s ‘greed is good’ sound-bite.  All sides use psychological tactics to gain momentary bargaining advantages and to leverage power imbalances, from Swifty Lazar’s late night reply on Frost’s opening bid to Birt, Reston Jr. and Brennan’s interruptions of the interview taping at strategic points that are beneficial to their teams.  Frost opts to ‘lure the tiger from the mountain’ (36 Strategies) for Nixon to self-disclose, enraging Reston Jr. and Zelnick who want a front-on attack about Watergate and the Vietnam War.  Nixon uses sleight of mouth patterns to interrupt, stall and throw Frost off guard.  Birt is caught in a position akin to a consultant or line manager: responsible for logistics and having to persuade all parties to move forward.  Anyone who has had to raise money against the odds for a project will wince with familiarity at Frost’s desparate meetings with television network chiefs and advertising agencies.  It’s this pointillism which makes Frost/Nixon even richer than the interview’s climatic revelations and why the film will be perfect for an MBA class on mergers and acquisitions, negotiation and game theory.

Now all I need to see are the Frost/Nixon original interviews . . .

Neil Chenoweth’s 2008 Walkley Award for Business Journalism

Congratulations to forensic journalist Neil Chenoweth and his colleagues on their 2008 Walkley Award for Business Journalism: an investigation into the failed stockbrokers Opes Prime.

I interviewed Chenoweth in 2002 for a Masters paper on Rupert Murdoch’s negotiation strategies.  During our talk, Chenoweth gave me a couple of “aha!” moments on how to conduct a forensic journalism investigation, Murdoch’s use of game theory to understand other parties in a deal, and the murky underworld of cable and satellite television.

Chenoweth writes regularly for the Australian Financial Review, an Antipodean equivalent of the pre-Murdoch Wall Street Journal.  Chenoweth’s Virtual Murdoch: Reality Wars on the Information Superhighway (Secker & Warburg, London, 2001), published in the US with new material as Rupert Murdoch (Random House, New York, 2004) chronicles his decade-long investigation into the world’s most powerful media mogul.  Read a chapter-by-chapter summary here.  Chenoweth’s book Packer’s Lunch (Random House, Sydney, 2006), reviewed here, also has substantial research on Sydney’s corporate dealmakers in the 1990s and their Swiss bank accounts.

Harvey Weinstein’s Priority Management

The Village Voice‘s Tony Ortega reveals how uber-media mogul Harvey Weinstein organises his priorities, in-progress projects and key stakeholders:

(1) a “Calls you owe” and “Need to call” daily telephone list
(2) a one-line summary of contactees and their needs
(3) a coterie of personal assistants to handle those sensitive emails

The first two are sparse and remind me of David Allen‘s productivity/workflow heuristics Getting Things Done.

Ortega cites an email to Weinstein by former Weinstein Company employee Lori Sale as a model of succinct communication management:

(1) a one-line summary of the background context for negotiations
(2) the deadline for a decision to be made
(3) the spread of negotiation offers made — with financial details and impact
(4) any counterparty offers and response relevant to (2) and (3)
(5) contact protocol and email signature

M&A communication streamlines (1) – (3) while game theory, negotiation and risk management provide frameworks and methodologies for (4).

Ortega’s garbological adventures to discover Weinstein’s strategies for management (communication,
priority & stakeholders) are on par with
HBO’s Entourage television series on deal-making in Digital Hollywood and Nikki Finke’s blog Deadline Hollywood Daily.