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- About Us
When Playing Dumb Is Smart
16 September 2002 (All day)
MOUNTAIN VIEW, CALIFORNIA--"That place is so popular that no one goes there anymore," Yogi Berra once said. As usual, Yogi was onto something. Whether you're picking a restaurant, a lane on the freeway, or a stock, you have to zig when other people zag. Now, by studying a fiendishly simple game that rewards nonconformity, researchers have found that the best "ziggers" choose a simple strategy and stick to it. Call it the Yogi Principle: They're so dumb, they're smart.
In the "minority game," each player picks a number, 1 or 2, and the ones who are in the minority win. It should be played repeatedly, so each player has a chance to develop a strategy. Simple as it is, the game has inspired more than 100 research papers since physicists Damien Challet and Yi-Cheng Zhang invented it 5 years ago at the University of Fribourg, Switzerland. "The minority game is a very clever way of capturing the naked dynamics of being different," says physicist Robert Savit of the University of Michigan (UM), Ann Arbor.
The irony, which Yogi would appreciate, is that whenever any strategy (such as "stick with my last number if I won, change if I lost") becomes too successful, other players imitate it and the strategy becomes a losing one. Therefore, using any strategy at all may seem like a waste of effort. Nevertheless, experiments have shown that computers playing against each other do develop (and discard) strategies, and over the long term win a higher percentage of games than they could by random guessing. They can do this because as a whole, groups of players develop predictable patterns of behavior.
But what would humans do? Humans are more likely to play hunches than computers, and this might prevent any patterns from emerging. To find out, Savit and UM psychologist Richard Gonzalez organized 400-round games among students, paying the players 5 cents each time they won. Like the computers, human players gradually won a higher percentage of games over time. Savit and Gonzalez also found that the ones who earned the most money had the simplest strategies and played hunches or changed strategies the least--very much like the computers. "The biggest winner of all, I'm sorry to say, was an economics student who simply picked 1 every time," says Savit, who presented the findings here last month at a NASA-sponsored workshop.
According to other experts, the study may help explain how patterns of behavior emerge in stock markets. "Standard economics says that everyone behaves rationally," says Oxford physicist Neil Johnson, "but in the minority game, even people who are trying to be rational come up with completely different predictions." However, Johnson warns that the "jury is still out" on how rigorously the minority game models real stock markets.