Current Reading - A Mathematician plays the Market

Chapter 1 - Anticipating other Anticipations

This chapter illustrate how one has to anticipate other investors' anticipate the common knowledge or even anticipations of other investors' view/ anticipations in the stock market via various examples.

I would say it's more on behaviour investment, which is always uneasy to anticipate.

Various conclusions of the examples illustrated in this chapter only ride on an assumptions that all participants are rational beings while they anticipates how other acts towards others anticipations on other investors or response towards a mutual and common knowledge.

Unfortunately, in the real stock market, not all investors are rational.. they believe they were, but they may be fooled by the market information and environment, which they may result in acting irrationally.

Besides, not all information are publicized. When common knowledge is announced, there exists a institutional investor (i.e. I-banks and Fund house) who already see these information as mutual or common knowledge among themselves. While these institutional investors are the majority investors of the stock market, hence when these "common knowledge" are publicized to all investors, actually not only the stock prices have reflected this information, but also institutional investors already anticipates the response of the minority of small investors. To a certain extend, it's a tool to fool the minority individual investors so that institutional investors could either put the stocks to them at a very high price, or buy the stocks at a very low price from them.

To conclude, I believe there is no way for individual investors to beat the institutional investors or to easily anticipated their behaviour/ anticipations due to asymmetrical information/ "common knowledge". The only way an individual investor could gain from the stock market is to think like an institutional investor by anticipating how they anticipates the economy, the stock/ company to be invested, the reaction of other minority investors, and their next action towards any possible variables. Only by thinking or anticipating like an institutional investor and acting like one of them, so can an individual investor make a slim profit from the stock market.

To be continued...