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Dr. Alex Castaldo

 

 

12/09/2005
We Can't Disagree Forever, by Dr. Alex Castaldo

There is a result in Game Theory called the We Can't Disagree Forever Theorem. As a game is played, the players will learn about the situation by observing the other's move and eventually they will converge on a common understanding or as it is called 'common knowledge': every player knows certain things and knows that the other players know them. This is a difficult area of Game Theory.

John Allen Paulos gives a complicated and somewhat artificial example involving two investors who have partial and non-overlapping inside information about what is going on at a startup company. By observing whether or not the other has dumped their stock yet, they are able after a few steps to reconstruct the full inside information even though each only has half of it.

I believe it has no practical application, but is interesting conceptually: people in a market can figure out a certain number of things by watching the market reactions.

 

 

 

Alessandro Castaldo, CFA, is a researcher and trader for Manchester Trading. Dr. Castaldo wrote his PhD dissertation on stock market volatility at the City University of New York, and taught courses in finance and options to undergraduates at Baruch College (CUNY) from 1998-2001. He has been associated with Circle T Partners, LP, a $400 million equity hedge fund; and Willowbridge Associates, a $1 billion-plus commodities trading adviser, where his responsibilities included the ongoing refinement of a market-neutral statistically based ("stat-arb") stock selection model.  Dr. Castaldo holds a B.S. in electrical engineering/computer science and an M.S. in management from the Massachusetts Institute of Technology, and worked as a software engineer at SEI Corporation/TMI Systems, Software Research Corp. and Systems Constructs Inc. before entering the finance profession.

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