A price-first checklist for noncooperative market games

Private objectives, not a shared one

The discussion applies noncooperative game theory, which studies how self-interested participants interact while each pursues a private objective. A noncooperative game is a contest in which each participant pursues a private objective rather than a shared one.

How the contest can be written

A game can be written in normal form as the full set of strategies and payoffs. That compact description lists every contemplated approach and the payoff attached to it. A game can also be written in extensive form as a tree of an initial node, player-owned decision nodes, move edges, and a terminal node.

Nash equilibrium is presented as a strategy combination in which no participant has a reason to change unless another participant changes first. The statement assumes mutual awareness of those strategies.

How the market is characterized

A zero-sum game transfers one side's payoff from another side's loss. Sequential play lets the later mover respond. A simultaneous game requires each participant to choose without reacting to a contemporaneous move.

The market is characterized as a noncooperative, continuous, simultaneous zero-sum contest. A continuous game has no fixed roster of participants, moves, outcomes, or solutions, and approaches are chosen from a continuous set. Price is treated as perfect information because it is the shared observable available to every participant at a given moment, so every participant can observe what can be known at the time a choice is made.

Name the contest and the other participants

The prescribed decision process is to identify which contest and style are being played, attempt to identify other participant types and their likely approaches, and refrain from assuming that every participant is rational or trying to win.

Editorial reading: that sequence is the pre-trade checklist. Write the contest, write the other participant types, and write the refusal to assume that every participant is rational or trying to win.

Write the response to price in advance

A complete strategy is a description of how a participant will behave under every contemplated circumstance, including the planned reaction to a price change.

Editorial reading: bind every entry, exit, and stand-aside rule to that planned reaction. The analytical stance replaces impulse with a prewritten response map so emotion does not substitute for the procedure.