campbell
11-03-2009, 12:16 PM
Here's one likening it to chess:
http://www.global-derivatives.com/docs/Chess_-_A_Valuable_Teaching_Tool_for_Risk_Managers_%28Pos telnik%29_2008.pdf
How does chess resemble risk analysis? Are there similarities, for example, between the way a chess player studies opponents’ games and the way a risk analyst studies clients’ portfolios? Igor Postelnik takes a comprehensive look at chess strategy and discusses the lessons that risk managers can learn from chess.
One of the most obvious features of financial markets is that prices move up and down unpredictably. This has led to random walk models that, in turn, suggest that practitioners should look for insight to games based on randomization: e.g., coin flips, dice rolls and card shuffles. In this article, I’d like to look at risk analysis from a chess master’s perspective. I’ll try to compare chess analysis to risk analysis and explain what risk management might learn from chess.
Although chess has no randomness or concealed information, it is nonetheless unpredictable. If two players sit down to play a game of chess, neither the game nor the result is the same as the game the same two players played yesterday.
Imagine a risk manager and a hedge fund manager trying to decide an appropriate leverage level for a portfolio and two opposing chess masters trying to decide how complicated they want their positions to be. Are there no similarities? Let’s see.
Just as higher leverage may enhance return or cause bigger loss for a risk manager or a hedge fund manager, a more complicated chess position may open unexpected variations that will lead to first-prize money or leave a player without a prize at all. Each chess move has advantages and disadvantages. While each move’s advantages include creating the possibility of a certain desirable future line of play, there is a risk that each move will open up possibilities for (perhaps unforeseen) lines of play that are desirable for the other side. Weighing the risks of this play and counterplay is the key to good judgment in chess and is really a type of risk management.
I'm no chess-player, so I cannot make any good claim to the analogy.
Here's a blog link from Susan Polgar [of the famous chess family]:
http://susanpolgar.blogspot.com/2009/10/chess-valuable-teaching-tool-for-risk.html
http://www.global-derivatives.com/docs/Chess_-_A_Valuable_Teaching_Tool_for_Risk_Managers_%28Pos telnik%29_2008.pdf
How does chess resemble risk analysis? Are there similarities, for example, between the way a chess player studies opponents’ games and the way a risk analyst studies clients’ portfolios? Igor Postelnik takes a comprehensive look at chess strategy and discusses the lessons that risk managers can learn from chess.
One of the most obvious features of financial markets is that prices move up and down unpredictably. This has led to random walk models that, in turn, suggest that practitioners should look for insight to games based on randomization: e.g., coin flips, dice rolls and card shuffles. In this article, I’d like to look at risk analysis from a chess master’s perspective. I’ll try to compare chess analysis to risk analysis and explain what risk management might learn from chess.
Although chess has no randomness or concealed information, it is nonetheless unpredictable. If two players sit down to play a game of chess, neither the game nor the result is the same as the game the same two players played yesterday.
Imagine a risk manager and a hedge fund manager trying to decide an appropriate leverage level for a portfolio and two opposing chess masters trying to decide how complicated they want their positions to be. Are there no similarities? Let’s see.
Just as higher leverage may enhance return or cause bigger loss for a risk manager or a hedge fund manager, a more complicated chess position may open unexpected variations that will lead to first-prize money or leave a player without a prize at all. Each chess move has advantages and disadvantages. While each move’s advantages include creating the possibility of a certain desirable future line of play, there is a risk that each move will open up possibilities for (perhaps unforeseen) lines of play that are desirable for the other side. Weighing the risks of this play and counterplay is the key to good judgment in chess and is really a type of risk management.
I'm no chess-player, so I cannot make any good claim to the analogy.
Here's a blog link from Susan Polgar [of the famous chess family]:
http://susanpolgar.blogspot.com/2009/10/chess-valuable-teaching-tool-for-risk.html