As usual, something important happened, that changed my
original “schedule”. So we shall come back on one of our previous topic, due to
a recent event;
General Vo Nguyen Giap died in a Hanoi hospital at the age
of 102 (or 103 by the Vietnamese count).
“His surname Vo translates as
"force" and his first name Giap means "strong armour",
fitting perhaps for a man who helped bring about the defeat of major military
powers.”
You may ask what all this to do with an economic blog?
Besides the great respect to the General, yes, in fact a lot… But please be patient, we shall get there…
General Giap was undisputedly one of the best military strategists
of the 20th century.
He used a number of unique tactics, like the "coordinated hit and run”, where the major objective was to occupy as much as possible
enemy troops on alert, wear out their moral and distract their force.
No greater example of Giap's genius can be found than Dien Bien Phu. He demonstrated his flexibility and determination by having his men hand-transport artillery and anti aircraft guns into almost impenetrable terrain. By doing what his enemy considered impossible without modern means left the French garrison dumbstruck in an untenable position.”
http://www.dw.de/vo-nguyen-giap-a-master-of-revolutionary-war/a-17141733
At the same time he was able to maintain a high moral among
his troops and the Nation.
“Giap
understood that protracted warfare would cost many lives but that did not
always translate into winning or losing the war. In the final analysis, Giap
won the war despite losing many battles, and as long as the army survived to
fight another day, the idea of Vietnam lived in the hearts of the people who
would support it, and that is the essence of "revolutionary war."
"We had to use the small against
the big; backward weapons to defeat modern weapons," Giap said.
"At
the end, it was the human factor that determined the victory."
All
in all, the essence of the strategy is to adopt and to use the strategy of your
enemy against him. Find your own weaknesses and use them as your power against
your own opponent.
To
force your enemy follow such a “game”, when he believes, that he is acting on
his own, but in fact he is doing its actions the way you lay out.
This
is in fact the most ancient eastern strategy, which Vietnam was perfecting for
the last 5000 years. Seemingly very effectively.
There is one last sentence form General Giap:
"We can put the past behind,"
he said in 2000. "But we cannot completely forget it."
So one of the reasons we talk about
this topic – just not to forget about it…
What is going on now? You remember the
main topic!
Under the current GLOBAL economic rules
the strong shall benefit, the weak shall suffer. Can we learn something form
the General’s strategies? Certainly we should!
How important can be a proper strategy? It is decisive in
most of the cases. 
Since then the World is laughing on British Lieutenant General A.E. Percival and Winston Churchill…
Churchill admitted himself, that it was
"the worst disaster and largest capitulation in British history."
Could be military tactics and strategies used in
economic decision-making?
I let you think about this for yourselves…
And there is one more question…
Do we have a tool for how to use military tactics and
strategies in our economic battles?
At 1903 December the 28th, a boy was born in
Budapest, his name was Neumann
János Lajos, as a first-born son of Neumann’s family.
We shall
call him John later on.
So John
happened to attend the Lutheran high school just meters from the place I started
my primary school.
But the same
place, the beautiful “Fasor” in Budapest could not influence me in having any particular
talent in mathematics.
But John, or
that time they called him “Jancsi”, was an extraordinary child prodigy in the areas of language, memorization,
and mathematics. As a 6-year-old, he could divide two 8-digit numbers in his
head. By the age of 8, he was familiar with differential and
integral calculus. (Halmos, P.R. "The Legend of von
Neumann". The American
Mathematical Monthly-volume= 80 (4–year=1973): 382–394.)
When I was
young, I was dreaming about to get just a little of the talent of that Jancsi
from our neighbourhood, so with my classmates, we searched each house, each
corner from the roof to the underground passages of that district, but no… We
could not find the secret of Jancsi’s talent…
But we found
something on those roofs, passages and under those old buildings. For Peter,
Gabriel and me. We found there also something valuable - friendship,
solidarity, unity and freedom. That is what escorts us during our life till
now.
Jancsi got
his Ph.D. at the age of 22 in Budapest.
Probably
those were some special years. Jancsi was part of a
Budapest generation noted for intellectual achievement: he was born in Budapest around the same time as Theodore von Kármán (b.
1881), George de Hevesy (b.
1885), Leó Szilárd (b. 1898), Eugene Wigner (b. 1902), Edward Teller (b. 1908), and Paul Erdős (b. 1913).
But let’s stay with Jancsi or better call him from now on, John…
At 1926 he was already in Berlin and in 1930 he was invited
to Princeton!
He has invented many things – among them you may recall his
works in quantum mechanics, linear programming, nuclear technology, computer
science…
I had the honor to learn about his game theory at 1980. I
must admit, that this theory fascinated me.
He
improved and extended the minimax theorem to include games involving imperfect
information and games with more than two players, publishing this result in his
1944 Theory of Games
and Economic Behavior (written with Oskar Morgenstern).
So what is
the Game theory about?
Trust me, it
was hard…
So please now
clear your mind and read the simplest explanation I have found:
"the study of the ways in which
strategic interactions among rational players produce outcomes with respect to the
preferences (or utilities) of those players, none of which might have been
intended by any of them." According to Wikipedia, game theory "attempts to mathematically capture behavior in strategic situations, in which an individual's success in making choices depends on the choices of others."
According to an online source, game theory is "a concept that deals with the formulation of the correct strategy that will enable an individual or entity, when confronted by a complex challenge, to succeed in addressing that challenge."
It involves the study of how the final outcome of a competitive situation is dictated by interactions among people involved based on the goal and preferences of those players, and on the strategy that each player employs. It was developed on the premise that for whatever circumstance, or for whatever game, there is a strategy that will allow one to win. “
http://math2033.uark.edu/wiki/index.php/Game_Theory
And then I
also try to say it in even more simple way…
The game theory helps you to find
possible ways to interact with your opponents depending on their and your
situation. Or how your decision will influence your result in a given
situation. Sometimes you can follow the way to maximize your gains. However
sometimes you need to focus on minimizing your losses… You and your opponent’s
situation is modelled in a matrix (now they would call it simply as an excel
sheetJ)
Why it is so
important?
John with his
colleague Oscar used this theory to model economic situations…
So still, why
we need to know about it?
So simple… By
this theory and further improved versions we can simulate almost all kind of
behaviors and processes, including the war strategies…
And why we
need to be able to simulate the war strategies?
Uhhh. Just to
be able to make proper decisions for our economy… right?
We need to
mention one more genius contributing the theory of games.
Most of you
have seen the “A Beautiful Mind” – the Hollywood film with Russell Crowe.
Stated simply, Amy and Wili are in Nash equilibrium if Amy is making the best decision she can, taking into account Wili's decision, and Wili is making the best decision he can, taking into account Amy's decision. Likewise, a group of players are in Nash equilibrium if each one is making the best decision that he or she can, taking into account the decisions of the others.
Game theorists use the Nash equilibrium
concept to analyse the outcome of the strategic interaction of several decision makers. In other words, it provides a way of
predicting what will happen if several people or several institutions are
making decisions at the same time, and if the outcome depends on the decisions
of the others. The simple insight underlying John Nash's idea is that one cannot
predict the result of the choices of multiple decision makers if one analyzes
those decisions in isolation. Instead, one must ask what each player would do, taking into account the
decision-making of the others.Nash equilibrium has been used to analyze hostile situations like war and arms races, and also how conflict may be mitigated by repeated interaction.
It has also been used to study to what extent people with different preferences can cooperate, and whether they will take risks to achieve a cooperative outcome. It has been used to study the adoption of technical standards, and also the occurrence of bank runs and currency crises. Other applications include traffic flow, how to organize auctions, the outcome of efforts exerted by multiple parties in the education process, regulatory legislation such as environmental regulations, and even penalty kicks in soccer.
http://en.wikipedia.org/wiki/Nash_equilibrium
John Forbes Nash, Jr. earned a Nobel Prize at 1994 for his work.
One is for
fact, both Johns were engaged in several super secret military and security
projects in the USA, so part of their work we can expect to become public only
at later stage. For Neumann it was known, that he participates in the US
nuclear program. Most probably as consequence he developed a bone pancreatic
cancer. John died at age 53, at the Walter Reed Army Medical Center
in Washington, D.C. under military
security lest he reveal military secrets while heavily medicated.
The work on
the analysis of complex systems is constantly going on. The game theory earned
several Nobel prizes for the later contributors. There appeared 3 dimensional, dynamic and other type of game theory models... However we are still lack of the
ability to handle close to reality complex systems in the field of economics
and far away of being understand and predict the economy in GLOBAL terms.
However there
are some encouraging signs….
This year the
Nobel Prize for chemistry went to a trio, who managed to model the chemical
reactions… Or let’s say in simple words, they have invented something, which
shall save a lot of time, money and efforts to conduct live tests. They have managed to simulate chemical
process by computer simulation… (By the way based again on the invent of the
above mentioned John Neumann in quantum mechanics)…“As with any model, the laureates' is a simplified version of reality. But at least it is no longer a dumbed-down one. Striving for anything else would, of course, be to miss the point of building a model in the first place. To quote Albert Einstein, a model must be as simple as possible—but no simpler. And in creating one, the three winners also brought chemistry fully into the computer age.”
http://www.economist.com/blogs/babbage/2013/10/2013-nobel-prizes-chemistry
Please do not forget their names!
Martin Karplus of Harvard, Michael Levitt of Stanford and Arieh Warshel of the University of Southern California - well done gentleman!
If you have remained any more patience, I want to treat you with another interesting dilemma. The mathematic modelling of the Rubik's Cube...
What this cube does with economics?
If you love maths, just watch this video with a simple explanation and sometimes later we shall come back on this...
http://vimeo.com/63887614
Hopefully I did not make you too much tired this time, so we shall try to follow with some simple tactics next time...
Please do not forget their names!
Martin Karplus of Harvard, Michael Levitt of Stanford and Arieh Warshel of the University of Southern California - well done gentleman!
If you have remained any more patience, I want to treat you with another interesting dilemma. The mathematic modelling of the Rubik's Cube...
What this cube does with economics?
If you love maths, just watch this video with a simple explanation and sometimes later we shall come back on this...
http://vimeo.com/63887614
Hopefully I did not make you too much tired this time, so we shall try to follow with some simple tactics next time...
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