From Adam Smith's 'invisible hand' to the very tangible effect of corruption and market manipulation, economic systems have always been under suspicion. "The game is rigged!" is often heard as a slogan to denounce injustices or counter-intuitive behavior given the complexity of the economy. What would happen if we accept, in fact, that the market can be rigged? How would it then change the nature of the economic relations (markets, contracts, industry, etc.) in which we participate?
Luís F. Seoane, CSIC researcher formerly at the Institute for Cross-Disciplinary Physics and Complex Systems (IFISC, UIB-CSIC) and currently at the National Centre for Biotechnolgy (CNB, CSIC), presents a mathematical model in the journal Physical Review X to explore these questions. He uses the game theory developed by John Nash (the main character of the film "A Beautiful Mind") to simulate economic systems in which anyone can cheat - altering the rules of the game in exchange for a set price. Can a rigged economy be stable? What is the level of intervention that can be tolerated? How does this change when the amount of money that moves in the market grows, or when the complexity of the economic system grows (introducing new possibilities for cheating)? These are some of the questions that the model raises and aims to answer.
The paper uncovers a possible strategy for undoing consensus situations - for example, cases such as cartels, in which several firms join together unopposed to fix the price of their services. Also, in the case of complex economies, which have many elements that can be rigged, a very unstable regime emerges in which large gains and losses follow one another in unpredictable ways. The mathematical model suggests that such a volatile regime could be avoided if wealth grew much faster than the opportunities for cheating.
"This model has a clear application for understanding real cases" says Seoane. For example, in the GameStop incident, a video game shop chain that has been heavily devalued over the past year. At the end of February, thousands of small investors synchronized through the social network Reddit to invest and raise the price of this company. The phenomenon went viral, catching large investment funds that had bet that GameStop would not stop falling. Several of these investment funds have gone bankrupt after incurring millions in debt. This was followed by cross accusations of market manipulation that are still being resolved in the courts and in the US Congress.The model considers both the coordinated actions of small investors and the short positions of investment funds as attempts to rig the company's price. Thanks to trading apps, the development of cryptocurrencies, and the proliferation of smart contracts, intervention in the economy by small investors is likely to democratize and expand. The study analyses the problems that could arise in connection with these new technologies, and aspects to which attention should be paid in order to avoid greater evils.
Luís F. Seoane. Games in rigged economies. Phys. Rev. X 11, 031058. DOI: https://doi.org/10.1103/PhysRevX.11.031058
Image: Carles G.O'D