Homo Oeconomicus: The Great Cyber Battle for the World

Do you remember the film A Beautiful Mind? It won four Oscars in 2002, including Best Picture. Russell Crowe played American mathematician John Forbes Nash, Jr., who broke the codes of Soviet agents on behalf of the United States government, and was considered the most influential proponent of game theory. He was even awarded the Nobel Prize for Economics in 1994 for this ‘play drive’. The portrait painted of him in the film is heart-rendingly emotional, but never makes clear to the viewer exactly what these highly regarded academic achievements actually were.

Machine versus machine: For the past few years, evolutionary algorithms (EAs) and computers, acting independently, have been fighting a war of annihilation against one another on the international financial markets. Transformer Death Blow © Alon Chou / cgwallpapers.com

It’s thanks to him that supercomputers are now capable of ruining the world much faster than we can comprehend. When all is said and done, the lunacy of the international financial markets, outraging as it does our moral sense, sprang from a sick mind. Not exactly the ‘beautiful mind’ suggested in the film. When it arrived in German cinemas, A Beautiful Mind received the subtitle Genie und Wahnsinn – Genius and Madness. There can be no doubt that Nash, born in 1928, was a mathematical genius. Even as he was making his breakthrough discovery, however, he was already suffering from a schizophrenic psychosis that was to torment him for decades, and led to him being committed to psychiatric hospitals.

John Nash was firmly convinced that man is nothing more than a selfish animal at heart, unscrupulously pursuing egoistic ends. A perverted view of humanity, which has increasingly come to dominate human interaction over the last 50 years. The Second World War had a formative influence on Nash’s youth. As a young man and mathematician in a white coat, he became part of the military’s war
of attrition against the ‘Reds’. All his thoughts and efforts were concentrated on outwitting an opponent that Nash never saw, and could never communicate with.

When the Devil Plays Poker

With both superpowers wielding the atomic bomb, the guiding strategic principle was to always suspect the worst. The logic of the Cold War resembled a game of poker: everyone trying to defeat their opponent, with every bluff and every lie justified. Yet the stakes were much higher than just a few dollars. It all hinged on preventing a nuclear first strike by the enemy without having to press the launch button oneself. This was the doctrine of ‘Mutual Assured Destruction’ (MAD). In this game of nuclear poker, the strategic chess moves were the same as in the card game. Being rational – that is, sensible – meant thinking only of yourself. That very same principle had long been the economists’ credo. So the mathematical magician Nash set about finding a formula that would make just that possible: to mathematically calculate the future behaviour of a human being.

Because human beings are fundamentally too complex and multi-layered to be summed up in an equation, their essential character–– at least theoretically–– must be reduced to cliché. So Nash took the claims of the economists and decided that selfishness was the driving force of all human behaviour. Lo and behold, the 22-year-old, then working for the RAND Corporation, succeeded in formulating his famous equation, subsequently known as the ‘Nash equilibrium’.

That was in 1950, game theory’s finest hour. A harmless-sounding name for a field of research that was far from harmless. Game theoreticians like Nash are anything but playful characters who enjoy creating tricky brain-teasers or family board games. They were, and still are, trying to provide sheer egotism with a mathematical foundation; to give it the veneer of a law of nature. The point of these intellectual games is a vicious battle for survival. Nash’s conclusions were so important to the US government that his papers have been considered a military secret since 1953 and locked away in safes.

The American journalist Fred Kaplan looked back on game theory: “[It] claimed that it was not sensible for the leopard to change his spots, that is, to do the best thing for both sides and to rely on your opponent to do the same. In this sense, game theory was the perfect intellectual underpinning for the Cold War.” In the minds of game theorists (and in the meantime, of too many leading businessmen and politicians), betrayal of the other, in order to achieve an advantage at their cost, is the most sensible way to behave – and therefore normal.

By the middle of the Cold War, Nash had developed a theory of ‘uncooperative’ games. This denotes games in which it is impossible to communicate with the playing partner or to trust them, and in which each opponent seeks to discover the intentions of the other. The golden rule is that the opponent’s most probable move – the most sensible or rational one – is always the most selfish one. The essence of this theory of rational decision-making, or ‘rational choice theory’, is quite simple: you have to put yourself in your opponent’s selfish position, in order to be better able to act on your own selfishness. When both parties do so, a sort of balance is produced (like mutual deterrence in the Cold War). This balance is the famous Nash equilibrium.

Using his mathematical formula, John Nash poured the attitude of the Cold Warriors into a scientifically recognised mould. An attitude that reached its apogee with the threat to annihilate the enemy. Unfortunately, the influence of the Nash equilibrium did not remain confined to war games. “The mathematicians have discovered a completely fool-proof system,” rejoiced John McDonald, the first journalist to be allowed into the secretive world of the game theory mathematicians in the early 1950s, “that can be used to play all manner of cut-throat games: from poker, to business – even up to war.”
Well, the global financial crisis was later to demonstrate that this system was by no means as ‘perfect’ and ‘fool-proof” as some had wanted the world to believe. Despite this, Nash’s equilibrium is still viewed today as “nothing but a mathematical theory of everything for thorough and effective egotism”, as FAZ co-publisher Frank Schirrmacher wrote in his bestseller Ego: The Game of Life.

With this formula, the later Nobel laureate Nash and his fellow researchers set in motion developments that were to have fatal consequences. While the society of half a century ago still considered selfish, inconsiderate behaviour to be a contemptible sign of a lack of moral fibre, science had suddenly declared selfishness to be the healthy and natural foundation of human aspiration.

At the time Nash was formulating his theory, very few people outside a small coterie of mathematical geniuses could get to grips with his formula; it had no practical value outside the context of Cold War strategy. So it didn’t occur to anyone to nominate Nash for the Nobel Prize. For the time being, anyway.

Yet with the arrival of the first computers – as always, the military had access to the latest technology – all that was about to change. Today, in the internet age with nearly all homes connected to each other via home computer, the selfishness embodied in the Nash equilibrium influences our entire lives. As a mathematical formula, the equation is highly complicated, “but it’s not necessary to learn it”, according to Schirrmacher. “Nowadays it can be found in the trading algorithms of hedge funds, in auction platforms, in the world’s most powerful advertising algorithms (e.g. Google AdWords), and presumably in social networks as well. It is the great ‘selfish automaton’ at the heart of our system.”

Computers are now so powerful that they can cope with Nash’s equilibrium without difficulty. And because that code has now been programmed into almost everything, we’ve learnt to play by the rules of selfishness. If you don’t have sharp elbows, prepare to be punished by life. These are the glad tidings of a world view that produces many little (and some not so little) egotists, seeing as it does the inescapable logic of selfishness behind all human endeavour.

Just as the doctrine of boundless selfishness poisons our souls, mobile communications destroy the biological harmony in our cells. One acts on the spiritual level, the other on the physical. It may be more than just coincidence that Nash’s game theory formula was first used in grand style during the telecommunications spectrum auctions. That was back in the 1990s and generated billions of dollars for the US government alone. Both the state and the bidders had consulted game theory experts using Nash’s equilibrium. The United Kingdom also organised an auction of 3G licences in 2000 according to the selfish rules of game theory, and it brought in more than £22 billion in profit. These staggering returns seemed to be definitive proof of the correctness of the Nash equilibrium.

Quants Conquer Wall Street

At the same time, the new mathematic- al miracle weapon was being deployed by high finance. After the collapse of the Soviet Union and the end of the Cold War, many mathematicians and physicists particularly in America had found themselves out of work, no longer needed by the military. So they packed up their bags and offered their services on Wall Street, where they were welcomed with open arms. Even back then in the early 1990s, the hordes of computers were already poised to conquer the world. Yet the Wall Street fund managers didn’t really understand how this new tool could be unleashed on the markets to generate maximum profit. The investment bank Goldman Sachs – already tightly intertwined with the centres of political decision-making – was the first institution to hire the so-called ‘quants’ (quantitative analysts) in large numbers. They programmed the computers with game theory algorithms, greatly increasing trading speed on the stock exchange and making a whole new genre of complex financial products possible, products that even the bankers themselves could no longer understand. So it was that the Cold War, with its ‘attacks’, ‘kills’, and ‘massacres’, became more than just part of the vocabulary of the finance business. Since then, the virtual “monsters” from the “Franken- stein laboratories of Wall Street” (as American economist and Nobel laureate Joseph Stiglitz would have it) have destroyed real national economies.

In the great ego-driven game of life, looking after number one is the priority. With the investment houses being able to generate profits like never before, the time was finally ripe to thank the man whose mathematical formula had made it all possible in the first place. So it was that in 1994, John Forbes Nash, Jr. was honoured with the Nobel Prize in Economic Sciences, for a mathematical equation that he had written down 44 years previously.

The virtual world of computers opened up an equally virtual world of money, a world with no limit to the accumulation of profit. The only things still standing in the way of high finance’s ‘rational self-interest’ were the bounds of law. President Clinton was to do away with them. The Illuminatus deregulated the financial markets over several stages between 1994 and 1999, freeing the banks from restrictive safety mechanisms. Then, Clinton removed the legal division of investment and retail banking, something that was introduced after the Great Depression of the 1930s to protect the financial system. His successor, the Illuminatus George W. Bush, finally completely tore the lid off Pandora’s box in 2004, by permitting investment banks to finance their operations entirely on credit. Thus fell the last legal restriction still halfway protecting the people from the crazy greed of high finance. Just three years later, the world started sliding into a financial crisis that still shows no sign of ending.

Act Like Lightning

Just as profits on the stock market spiral up (or down!) incredibly quickly, the processing power of modern computers is beyond the bounds of human comprehension. Whoever still believes that the important decisions are made by the traders on the floor of the stock exchange is stuck in the last century. Nowadays, true power lies in the electrons that race at the speed of light through computer circuit boards. Five million shares are bought and sold every minute on the New York Stock Exchange alone – no human being can keep track of that. But computers can. “Within four years, the average length of share ownership in the USA went from two months to 22 seconds,” wrote Schirrmacher. In the 1950s for that matter, the average time was four years.

This so-called ‘high-frequency trading’ (HFT) has long since seen any human dimension thrown overboard. In his current bestseller, Schirrmacher explains what this neutral-sounding term means in practice: “Financial market transactions are now approaching the speed of light. Traders install their servers as close as they can to the New York Stock Exchange computers in order to save milliseconds. A specially laid transatlantic cable will reduce the data transmission time between Wall Street and the City of London by 740 nanoseconds (1 nanosecond is a millionth of a millisecond). Translated to our normal understanding of time, that’s the difference between having to make a decision in a minute or a whole ten weeks. The trap closes one million times faster than any human would even be capable of realising that they were in one.” One of those employed to build these systems added: “When a normal customer looks at a share price, it’s like he’s looking at a star that in reality has already been extinguished for thousands of years.”

In other words: flesh and blood traders are no longer needed for high-frequency trading. In 2008 the boss of Lehman Brothers, known among his staff (but never to his face) as ‘Darth Vader’, declared to his workers that all that was needed for limitless profit was “the power of the machines”. Yet that wasn’t to protect Joseph M. Gregory from losing his job just a few months later. The investment bank famously went bankrupt on September 15th 2008 as a result of the housing crash and financial crisis.