MSN status and game theory

Appearing Offline on MSN/Windows Live Messenger: Game Theory Analysis
May 10th, 2008

A few years ago, Microsoft introduced the ability to “hide” on Appear Offline on MSN Messenger and to keep talking to people. This is quite a useful feature for the anti-social types who really don’t want anybody to talk to them!

I’ve noticed some interesting trends since this feature has been introduced. The people who used to have their status stuck on “away” now use appear offline. This is perhaps frustrating when you then end up calling or texting at extortionate rates your friend instead whilst you’re actually both sitting at your computer!

The reason why people use “appear offline” is so they can be selective about who they talk to. Fair enough. But when other people also use “appear offline”, it doesn’t work. This could be illustrated using a bit of game theory.

Appear Offline

Initially, lets say that both persons A and B gain 2 units of utility from being online in MSN Messenger. This utility could be in many forms: pleasure gained from sharing gossip, money saved in not having to text or time saved. The exact form of the utility isn’t important.

Now lets say Person A decides to “Appear Offline” but Person B is still “Online”. Person A will only talk to Person B when it is beneficial to him. Person A will still gossip with Person B but only in times convenient to himself and when he’s stuck on his particle physics essay, he can still see when Person B is online and get help from him. For this reason, Person A’s utility increases from 2 to 3.

But Person B won’t derive any utility. When he needs somebody to talk to, or has run into a brick wall upgrading to Service Pack 3, he won’t be able to get through to Person A on MSN Messenger. Instead, he might end up calling or find a more sociable person to talk to! Hence Person B derives no utility from this arrangement.

Notice that the payoffs are symmetrical. If Person B decides to “Appear Offline” but Person A doesn’t, Person B will gain 3 units of utility whilst Person A will gain nil.

The fourth possible situation is when both Persons A and B decide to “Appear Offline”. Neither persons derives any utility from this arrangement as they’ll never talk to each another. They might as well actually be offline.

The best arrangement

As we can see, in this analysis the best possible outcome is that both persons A and B are online. They both derive 2 units of utility from this arrangement and 4 units of utility are gained in total.

Person A or person B could seek to increase the utility they gain by appearing offline. This increases their own utility to 3 units. Would they do this in reality? Rationally, probably yes.

If person A decided to stay “online”, person B would gain 2 units of utility from staying online and 3 units from appearing offline. So in this situation, person B should appear offline to maximise their own payoff.

If person A decided to “appear offline”, person B gains no utility either way. So it really doesn’t matter whether person B stays online or appears offline. But they don’t lose any utility by appearing offline.

By considering all the possible outcomes, person B will rationally choose to appear offline to maximise their payoff. As the situation is symmetrical, person A should also rationally choose to appear offline. The outcome? Both persons A and B “appear offline” and nobody gains any utility.

Back to the real world…

In this discussion and game theory model, I’ve abstracted from reality. Of course, it isn’t true that everybody on MSN Messenger appears offline these days. But I will say that amongst my contact list, I know quite a few people do and it has lead to some annoying situations. I’m even guilty of “appearing offline” on many occasions without realising the person I want to talk to is also appearing offline and waiting for me to come online.

This interesting post was found on Cow's blog at http://cow.neondragon.net/ and not written by Sense n cents! Read more ...

Financial tracker II

Happy new year all!

New year new updated version of the financial tracker, this time with weekends and holidays(malaysian)!

Available here!

Into its third edition, its been a great help in allowing me to gauge and control my expenses!

Good times bad times, we all should manage our money!

Here's to an awesome year ahead!!!

Related links:
Financial tr5acker 2008
QnA
10 ways to save money

Read more ...

Happy Holidays

Read more ...

Stocks or Cash?

This interesting article was written by Mr Ooi Kok Hwa and I am sharing it with you!

I'm sure this would be one vital question all investors or would be investors OR arm chair investors would be contemplating right now...
Especially with the economy in such turmoil.

In these troubled times do you hold stocks or cash?


Wednesday November 5, 2008
OVER the past few weeks, as a result of the sharp plummet on the stock market, some investors regret not selling their stocks early as almost all of their stocks have been incurring huge losses.

However, the market recovery over the past few days caused some investors to again regret — not buying stocks when the market hit the bottom.

The decision to hold more cash or stocks is one of the most difficult decisions to make.

According to a study by Gary P. Brinson, L. Randolph Hood and Gilbert L. Beebower in 1986, 95% of the variance of fund returns was the result of the asset allocation decision.

Hence, the right asset allocation between cash and stocks plays a very important role in determining the returns of a portfolio.

In this article, we will look into two key strategies in asset allocation, namely the constant mix (CM) and the constant proportion portfolio insurance (CPPI) strategy.

The key principle behind the CM strategy is to buy stocks when the market drops and sell them when the market recovers.

As for the CPPI strategy, it is the reverse, which is to sell when the market plunges and buy when it recovers.

We should continue selling stocks until the portfolio drops near our pre-set floor level. Once the market touches our floor level, we will hold all cash and no stocks.


Under normal market conditions, the CM strategy is an excellent tool for rebalancing our portfolio.

This strategy requires us to rebalance our portfolio based on a constant mix, where we set a constant ratio of stocks to total assets.

Assuming we have only two asset classes, namely stocks and cash, we will maintain the desired invested portion in our portfolio regardless of market conditions.

If we have a portfolio value of RM100,000 and intend to maintain a stocks to total asset ratio of 60%, we invest RM60,000 in stocks and hold RM40,000 cash.

If the overall market drops by 10%, our stocks will drop by RM6,000 (10% of RM60,000) to RM54,000. Now, our portfolio will be RM94,000 (RM54,000 + RM40,000 cash)

Our invested portion will drop to 57.5% (RM54,000 of stocks divided by our new portfolio value of RM94,000).

In order to maintain a 60% investment, we need to have an invested portion of RM56,400 (0.6 x RM94,000).

So we will use RM2,400 in cash to buy stocks (RM56,400 - RM54,000).

After this portfolio rebalancing, our new invested portions will be RM56,400 in stocks and RM37,600.in cash.

This will bring the invested portion back to 60% with the total portfolio value of RM94,000.

The CM strategy will cause us to buy more stocks when the market drops. We will be able to acquire a lot of quality stocks at cheap prices.

However, we will continue buying more stocks while the overall market continues to plunge.

During a bear market, we will see our portfolio shrink in value as our earlier purchase price may get cheaper.

Unfortunately, not many investors can tolerate a drop in their portfolio value.

The CPPI strategy is appropriate for use in either a super bull or a super bear market.

It is not suitable for use on normal market periods as we need to sell stocks when the market drops and buy when the market is on the way up.

We may end up buying at high prices and selling them at low.

Under the CPPI strategy, the portion of money in stocks is based on the formula that:

Money in stock = M x (TA - Floor) Where M = stock investment multiplier (proportion), TA = total assets held in the portfolio, Floor = the minimum allowable portfolio value (zero risk level) and TA - Floor = cushion or funds that can be put at risk.

Assuming we have a portfolio value of RM100,000, if we set our minimum allowable value (Floor) = RM70,000 and stock multiplier (M) = 2, we will invest RM60,000 in stocks [2 x (RM100,000 – RM70,000)].

If the overall market drops by 10%, our stocks will drop by RM6,000 (10% of RM60,000) to RM54,000. Our portfolio will be RM94,000 (RM54,000 + RM40,000 cash).

Our invested portion needs to be reduced to RM48,000 as 2 x (RM94,000 – RM70,000).

We need to dispose of RM6,000 worth of stocks (RM54,000 – RM48,000) and bring the cash level to RM46,000.

Following this portfolio rebalancing, the portion invested in stock is RM48,000 with cash of RM46,000.

The total portfolio value is RM94,000.

We will continue to sell stocks and hold more cash as the market drops.

We will stop investing in stocks when our total portfolio hits the floor level (TA – Floor= 0).

The strength of the CPPI strategy is that our lowest portfolio value at any point in time will be RM70,000 whereas the CM strategy may cause our portfolio value to drop much lower if the market crashes further.

In conclusion, the choice of strategy will depend on the overall economic outlook.

Unless we know our economy will not drop into recession, otherwise — based on our current situation, the CPPI strategy has the advantage of protecting our minimum portfolio value at the floor level.






OVER the past few weeks, as a result of the sharp plummet on the stock market, some investors regret not selling their stocks early as almost all of their stocks have been incurring huge losses.

However, the market recovery over the past few days caused some investors to again regret — not buying stocks when the market hit the bottom.

The decision to hold more cash or stocks is one of the most difficult decisions to make.

According to a study by Gary P. Brinson, L. Randolph Hood and Gilbert L. Beebower in 1986, 95% of the variance of fund returns was the result of the asset allocation decision.

Hence, the right asset allocation between cash and stocks plays a very important role in determining the returns of a portfolio.

In this article, we will look into two key strategies in asset allocation, namely the constant mix (CM) and the constant proportion portfolio insurance (CPPI) strategy.

The key principle behind the CM strategy is to buy stocks when the market drops and sell them when the market recovers.

As for the CPPI strategy, it is the reverse, which is to sell when the market plunges and buy when it recovers.

We should continue selling stocks until the portfolio drops near our pre-set floor level. Once the market touches our floor level, we will hold all cash and no stocks.


Under normal market conditions, the CM strategy is an excellent tool for rebalancing our portfolio.

This strategy requires us to rebalance our portfolio based on a constant mix, where we set a constant ratio of stocks to total assets.

Assuming we have only two asset classes, namely stocks and cash, we will maintain the desired invested portion in our portfolio regardless of market conditions.

If we have a portfolio value of RM100,000 and intend to maintain a stocks to total asset ratio of 60%, we invest RM60,000 in stocks and hold RM40,000 cash.

If the overall market drops by 10%, our stocks will drop by RM6,000 (10% of RM60,000) to RM54,000. Now, our portfolio will be RM94,000 (RM54,000 + RM40,000 cash)

Our invested portion will drop to 57.5% (RM54,000 of stocks divided by our new portfolio value of RM94,000).

In order to maintain a 60% investment, we need to have an invested portion of RM56,400 (0.6 x RM94,000).

So we will use RM2,400 in cash to buy stocks (RM56,400 - RM54,000).

After this portfolio rebalancing, our new invested portions will be RM56,400 in stocks and RM37,600.in cash.

This will bring the invested portion back to 60% with the total portfolio value of RM94,000.

The CM strategy will cause us to buy more stocks when the market drops. We will be able to acquire a lot of quality stocks at cheap prices.

However, we will continue buying more stocks while the overall market continues to plunge.

During a bear market, we will see our portfolio shrink in value as our earlier purchase price may get cheaper.

Unfortunately, not many investors can tolerate a drop in their portfolio value.

The CPPI strategy is appropriate for use in either a super bull or a super bear market.

It is not suitable for use on normal market periods as we need to sell stocks when the market drops and buy when the market is on the way up.

We may end up buying at high prices and selling them at low.

Under the CPPI strategy, the portion of money in stocks is based on the formula that:

Money in stock = M x (TA - Floor) Where M = stock investment multiplier (proportion), TA = total assets held in the portfolio, Floor = the minimum allowable portfolio value (zero risk level) and TA - Floor = cushion or funds that can be put at risk.

Assuming we have a portfolio value of RM100,000, if we set our minimum allowable value (Floor) = RM70,000 and stock multiplier (M) = 2, we will invest RM60,000 in stocks [2 x (RM100,000 – RM70,000)].

If the overall market drops by 10%, our stocks will drop by RM6,000 (10% of RM60,000) to RM54,000. Our portfolio will be RM94,000 (RM54,000 + RM40,000 cash).

Our invested portion needs to be reduced to RM48,000 as 2 x (RM94,000 – RM70,000).

We need to dispose of RM6,000 worth of stocks (RM54,000 – RM48,000) and bring the cash level to RM46,000.

Following this portfolio rebalancing, the portion invested in stock is RM48,000 with cash of RM46,000.

The total portfolio value is RM94,000.

We will continue to sell stocks and hold more cash as the market drops.

We will stop investing in stocks when our total portfolio hits the floor level (TA – Floor= 0).

The strength of the CPPI strategy is that our lowest portfolio value at any point in time will be RM70,000 whereas the CM strategy may cause our portfolio value to drop much lower if the market crashes further.

In conclusion, the choice of strategy will depend on the overall economic outlook.

Unless we know our economy will not drop into recession, otherwise — based on our current situation, the CPPI strategy has the advantage of protecting our minimum portfolio value at the floor level. Read more ...

lottery options

I have found that the best teachers bring forth the most complex ideas in the most simplest of ways. Today, I learnt a new way of explaining options in layman terms!

In its simplest of forms, an option could be described as a financial lottery ticket.

You pay money(option premium, assuming that your are going long, ie buying an option) for the potential to earn more money(potential upside).

I felt enlightened when i saw it being put forth from such a different angle as it had almost nothing to do with investments or finance!

But as the wise Charles Handy puts it, "when we walk in alien worlds, we see things afresh or see fresh things."

The difference would be that lottery would be along the lines of gambling and based on pure chance while options are TYPICALLY entered because we have formed an informed view regarding the market movements of the underlying financial instrument based on market research/analysis or even 'fish market rumours'.

For in depth info on gambling and investment read here!

And lastly, I would love to share with you an interesting article brought to my attention from Ms Mabel regarding new terms that have cropped up due to the state of the world financial economy.

" This new era on the sharemarket has thrown up a new dictionary with its own set of words. Let's have a look at the important ones and what it means for your portfolio."

Read more ...

Outsaucing

yada yada yada... economies collapsing and the world crumbling to pieces... you want to know more about that? go google it! However, what I'd like to share about today is something i learnt in the past weeks - power of outsourcing.

Why do companies outsource certain processes out?

For easy visualization purpose:

Why would Coca Cola pay a delivery company to deliver bottles of coke from the factory to the end retail sellor?

Simply AND ideally put:

Coca Cola's main line of business would be to produce and sell Coca Cola, instead of spending their resources in distribution, they can concentrate on churning out more coca cola or come up with better ideas to improve processes, increase uptake or brand equity.

Delivery company comes in as a specialist, with distributions as their main line of service.

In economic theory:

Delivery company has a comparative advantage over Coca Cola, making them more efficient and allowing each party to achieve economies of scale.

So....
How can these be applied to everyday life?
Well, say your brother has to mow the lawn and you to wash the dishes... and you take 15minutes to mow the lawn but take 30 minutes to wash the dishes and vice versa for your brother. So by comparative advantage, it'd make sense for you to switch tasks!

This idea of outsourcing also nicely ties in with an idea from a book i've been reading:
the elephant and the flea by Charles Handy which is about how big corporates, elephants and slowly trimming down and outsourcing to smaller specialists - the fleas which is increasingly becoming a trend in this day and age.

I have yet to finish the whole book, however, from what i've read so far, it's a really insightful and refreshing book!

and why was the earlier part of my post in realy short staccato-ish manner because i wanted to bring twitter your attention!

okay.. i hope i've tied up the simple overview of outsourcing to you in both business overview and in terms of economics and tie in a book reccomendation!

did you also notice that...

when I'm linking out to wikipedia sites
that i am in effect outsourcing?
Read more ...

Three

In the spirit of the Rule of Three, this week I am recommending three reads from three reputable financial blogs which I find to be highly useful.

28 Gift Ideas that Save Money for the Recipient
[This is a great post, and the title speaks for itself.]

The 12 Biggest Financial Mistakes People Make Over & Over Again
[This blog brings you back to basics to sort out the chinks in your finances.]

The Rule of Three
[And of course, the rule of three. Call me a cheapo if you must but this is essential reading!]

There! 3 quality posts for the time/effort of browsing through 1, no reason why you should not stay glued to this blog! Read more ...