The Game of Risk, Sigmas, and the Big Short

A hodgepodge post.

Rick’s Doctor links to the movie The Big Short and calls it a movie with 4 sigmas in it, an accurate description.

When I was young, I would play Risk. I tended to win, but in hindsight, I was clueless and only won because I was playing even more clueless people. (Sorry, family.) My strategy was to focus on getting as much contiguous territory as possible, and then placing all, and I mean all, my armies on the outskirts. This would generally overwhelm my opponents at particular points and allow me to grow.

I’m sure having contiguous territories is still important in a properly-played game, but the strategy of having no reinforcement except on your borders is disastrous. It means a single pinprick in your defense opens up even a modest army to just go stomping through your territory in a single turn. Your opponent doesn’t even have to adequately use the resulting resources. The mere fact you lost that much territory and lose all your bonus armies, which further prevents you from closing the holes, means that you’re toast even in the hands of an unskilled player at that point.

In novice hands against a novice, the strategy is very unstable. Either you steamroll your opponent or you get steamrolled. As a strategy for ending the game as quickly as possible because you don’t really want to play in the first place, it’s probably not a bad one. Were I ever to be forced to play Risk again, I might deploy it for just this metagame reason! But as a winning strategy, it’s very dangerous.

The way the evil people in charge of our country and economy play the Economy Game strikes me as very similar. Much focus and effort is put into maintaining the front and the facade for everyone else. If anything challenges the facade, resources are redeployed from where they are doing something useful to maintain the facade and fake that everything’s OK.

A rational leader who had a long-term perspective, even a rationally-parasitic one, would let whatever bit of the economy was having trouble have its trouble, and repair itself naturally. But in the real world, that results in The Wrong People losing money and power, even if they could steal it back even greater later. (Evil is not known for its long-term time preferences.) So instead the resources are redeployed to the front to maintain the facade.

This is partially, if not largely, also responsible for creating the lemming-like nature of the market. Where ever everyone puts their money creates buying pressure, driving prices up. Following the crowd means you follow those rising asset prices. Being a lemming in this environment is profitable. Reinforce the facade and you make money. Being a contrarian, where a sigma can easily find himself, is a recipe for going bankrupt. You can be as objectively right about the market circumstances being broken as you like, but if you didn’t also anticipate the effect of the Powers That Be also redeploying other resources to cover over the problem, you may not be able to stay solvent long enough to reap the benefits of being correct.

The Big Short movie portrays this aspect. About two thirds of the way through the movie, the mortgage market is finally in collapse, but the value of the bonds in the market is going up. This part seems to have escaped the notice of a lot of people so it was hard to dig this up, despite half the rest of the movie being readily available. What the movie is wrong about is that this wasn’t stupidity. This was people who knew what was going on, and were deliberately deploying resources to buy up the bonds, to drive up the price, to make it look like everything was fine.

(I’ve been paying more attention to the markets in the past couple of years, and my conclusion after staring at it, watching it react to news and other things, is that this is now the dominant force in the current financial markets. I think it’s almost entirely manipulation from top to bottom at this point.)

The truth is, most Wall Street iconoclasts lose. Most people run up the army wall in Alaska in Risk and are defeated by the concentrated forces. But every once in a while, the battle is won, the balloon is pricked, the front collapses, and they get to advance into territory that has been rendered completely defenseless because all the resources were continually redirected towards maintaining that front.

Being a contrarian sigma in the markets is a recipe for pain. 99% of the time going against the herd gets you trampled by the herd. But every once in a while… every once in a while it is only the contrarian sigmas left standing, because the herd ran right off a cliff.

Any resemblance to current market conditions is… probably entirely accurate.