May 6, 2011

Nash Equilibrium

A number of open ended funds are offering their unit holders a very nice opportunity to make good usage of game theory and figure out what to do next.

Some funds (see related article in the Immobilien Zeitung -in German- ), are asking their current unit holders, what would be their behavior if the funds were to reopen for redemption. The underlying idea, is that the more unit holders opt for redemption, the more likely is the fund to liquidate.

As a unit holder, you basicly have to make two decisions:

First, decide what to answer to the initial question (I would redeem, or I would keep my units), and second, what to do if the fund actually reopen. The interesting feature of this game, is that, if the fund reopen, you do not have to do what you said you would do.  
This create, a nice game theory case, as you can play a number of strategies, either pure or mixed, in a unique real world full scale case of game theory. I leave you to figure out what the strategies could be, what are the associate payouts, if there is one or more nash equilibrium, and where they are.

If anyone has the time to solve this, I am interested in seeing how it looks. I would also recommend to fund managers to take a look into the game theory concept. A very good introduction from Yale is available on the iTunes University store ( if you are interested and have time for this, don’t miss this, it makes you want to go back to school).

Who said real estate is boring ?

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