Trader Mindset Toolkit: Playing chicken and winning

Trading is essentially about confidence. Confidence in your system and confidence in your ability to take the trade and follow it through. This confidence does not appear overnight but involves a bit of cultivation and perhaps a change in behaviour. Inevitably, lack of confidence stems from conflict within and outside. One of the best ways to manage conflict is using a well-known theory from Game theory called Chicken.

In game theory the game of chicken involves two seemingly rational people driving full speed towards each other in cars. The point of the game is to overcome fear and stay on course. The driver that gets scared and swerves away is the loser. The problem, of course, is that if both stay on course, then both will crash and die. The principle of the game is that while each driver prefers not to yield to the other, the worst possible outcome occurs when both drivers do not yield.

But, of course, it does not end there. True tacticians say the winner accepts the inevitable and throws his steering wheel out of the window right before the collision. This clearly states his intention and forces the other driver to yield.

The game of chicken is so dangerous that it would be nice if we could just avoid it. But an unfortunate reality is that we are faced with the same reasoning, every day we live and trade. In the uber competitive world of markets, one has to learn how to play the game of chicken. Here are a few strategies that can help you be the winner:

1. Dig in

In the game of chicken, your flexibility is a weakness. One of the best solutions is to prove that you will not change course. Limiting your options, and metaphorically becoming immovable like the steering wheel incident, can show the other side that you will not back down.

2. Pretend: Get a reputation for being tough

If you can’t credibly limit your actions, the next best option is to get a reputation for being tough so people don’t bother believe that you are serious.

3. Go for broke

Sometimes you cannot lock in your actions but instead have to fight head on. In this case it might be wise to show you are serious by going for broke.

The player that has nothing to lose is more dangerous and such threats will be taken more seriously.

4. Raise the risk to your actions (MAD)

Brinkmanship is a strategic move where you raise the risk of the game–bringing everyone closer to the brink–unless the other side relents. While you may prefer not to use these tactics  you have to be aware of  them as your opponents may employ them. MAD (Mutually Assured Destruction was a good example of this)

5. Withdraw from the game

Walk away, if you do a quick assessment and realise you are totally out numbered and out gunned then you retreat and regroup.

6. Get lucky: change the game

In some situations, you can avoid the game of chicken by being creative. Change the game and you can create incentives to cooperate rather than intimidate.