To outperform, advisers must have game theory: Singer

Fundamental analysis no longer enough in 'unstable multiplayer world,' says William Blair strategist

By Bruce Kelly

Oct 22, 2012 @ 3:40 pm (Updated 8:16 am) EST

Game theory

Investors and financial advisers need to broaden their perspective beyond stock and bond fundamentals, and incorporate three distinct disciplines into their thinking, according to Brian Singer, head of dynamic-allocation strategies at William Blair & Co. LLC. They are: geopolitical analysis, macroeconomics and game theory — or strategic-decision theory.

Advisers often focus on microeconomics, noted Mr. Singer, who spoke Monday morning in Chicago at the InvestmentNews Alternative Investments Conference. They need to think beyond that, particularly in this global political era.

“Game theory is a strategy of engagement in a complex environment, with rational entities looking at cooperation and conflict,” Mr. Singer said.

The current geopolitical environment is “now an unstable multiplayer world, and post-Cold War,” he said.

Mr. Singer related his analysis to questions this year regarding Greece's future in the euro.

“We conclude that the eurozone will stay together for now, and Germany has the greatest need for it to stay together,” Mr. Singer said. “We don't believe that the eurozone will stay together forever and Greece actually exits next year.”

If investors were to look at Europe from a theoretical gaming point of view, they could see political and coalition shifts that move Europe closer to a solution, he said. “There's nothing in historical data that will tell you how to interpret” such current political situations, he said. “Risk must be forward-looking.”

Mr. Singer said there are four powers in game theory.

The first is endowment power, meaning money, political capital and nuclear-weapons power. The second power is threat power, meaning the ability to threaten other players. The third is risk tolerance, and the last is coalition power.

Such powers are constantly changing, Mr. Singer said.

“Fundamental analysis is necessary but no longer sufficient for superior performance,” he said. “Superiority requires being unconventional. Accept randomness and mistakes.”