Algorithmic Game Theory Mini-Project

Stock Market modelled as Sentiment Game: Analysis of

infamous market manipulations using Game Theory

Group Members:
Aditya Ranjan Jha (20EE10006)
Riddhiman Moulick (20EE10093)
Karan Kumar (20EE10031)
Index

1. A Game Theory Model of Stock Market

2. Sentiment Game in Stock Market
3. Role of Common Knowledge in Sentiment Game
4. What is Market Sentiment?
5. What Is Pump-and-Dump?
6. Some Examples from the Past
7. Conclusion
8. Some Important References used
 A Game Theory Model of Stock Market

The Most Ideal game for Intra-day Trading is a Zero Sum Game, where one investor’s loss is
another investor’s gain. Well, the game that we wish to highlight today is the “Sentiment Game.”
A ‘sentiment game’ is played in the stock market, with information available to the public being a
key factor that affects trades. When an institution such as Eqwires research analyst posts
information for the public, all investors know that the information is available to all other
investors. Even though a certain trader may not necessarily agree with the analysis, they’ll have
to go ahead with the larger market sentiment at least in the short-run period.
I know. You know I know. I know you know I know. We know Henry knows, and Henry knows
we know it. We’re a knowledgeable family.

– Prince Geoffrey, “The Lion In Winter”

The internet has transformed the way people invest, as well as the way the public at large
obtains news; therefore, if a web writer or journalist disseminates a bullish or bearish
article about a company throughout the trading day, this can have a huge impact on its
stock. Some sources give advice based on the stock they own. These kind of
manipulations are known as Pump and Dump Schemes. We will talk particularly about
this manipulation later. But first let’s understand the Sentiment game model of stock
market
 Sentiment Game in Stock Market

Sentiment is affect. Sentiment is emotion. Sentiment is fickle and transitory. In the context of
investing, Sentiment is how you feel about a stock. But each investors is thinking about his or
her feelings about stocks in the same way that you are. And you all know it. And you all know
that you all know it. The strategic interaction of all investors trying to figure out how all other
investors feel about a stock, each of whom knows that everyone else is going through the same
decision process, is Sentiment.
In 1935, John Maynard Keynes bemoaned the Sentiment game as dominating markets to such a
degree that “genuine long-term expectation is so difficult today as to be scarcely practicable.”
Keynes described the Sentiment game as a “Newspaper Beauty Contest”, a media promotion
that was familiar to his readers .

Reference: Keynesian beauty contest - Wikipedia

A newspaper would run a page of photographs of pretty girls, and readers were invited to mail
in a ballot with their choice of the prettiest. If you picked the girl who got the most votes, you
were entered into a drawing for some sort of prize. Voting for the girl you think is the prettiest
is what Keynes would call the first degree of decision-making.
Now it doesn’t take a lot of thought before you realize that choosing the girl who you
truly believe is the prettiest is probably not a winning strategy. To win, you need to
choose the girl who gets the most votes as the prettiest, and your personal preferences
aren’t nearly as useful in that task as figuring out who everyone else is going to vote for
as the prettiest. Voting for the girl you anticipate more people will consider to be the
prettiest is what Keynes would call the second degree of decision-making.
But there’s a big problem with the second degree. It assumes that everyone else is
making a first degree decision, that everyone else is making a choice “on the merits” of
the photographs and you’re the only one smart enough to think about the average
preference of the group. As a result, you quickly realize that everyone will be thinking
exactly like you are, so you need to make a third-degree decision – who will get the
most votes when all the voters are basing their votes on who they think will get the
most votes? This is the Sentiment game!
 Role of Common Knowledge in Sentiment Game

Common knowledge is a condition usually required in game theory, so the model is

completely specified and its analysis is coherently undertaken. It completes the notion of
complete information, which requires all players to know the rules of the game and each
other’s utility function. Indeed, all players should also be required to be aware of this fact;
this is, all players must be aware of the awareness of the other players regarding the rules
and each other’s utility functions. Furthermore, each player must be aware that each
player is aware that each player is aware, and so on. To sum up, the awareness of the
description of a given game must be part of that description.

Here in Sentiment Game we see that knowing the true type of the other player will help
the investor to make decision , but that is of course not the part of players knowledge, so
knowing the sentiment of market will help them choose their investment strategies.
 What is Market Sentiment?

Market sentiment is the behaviour or the attitude of a group of people about the
economy or the market for a particular stock. It is bullish when prices are rising and
bearish when prices are falling.
Market sentiment is not always based on fundamentals as sometimes emotion
drives the market.
For example: If Famous Investor X appears on CNBC and says that the latest FOMC
announcement is a great and wonderful thing for equity markets, then the market
will go up. It won’t go up because investors agree with Famous Investor X’s
assessment of the merits of the FOMC announcement. The market will go up
because every investor will believe that every other investor heard what Famous
Investor X said, and every investor will be forced to update his or her estimation of
what every other investor estimates the market will do. The greater the signal
strength (from an Information Theory perspective) of Famous Investor X’s words,
the greater the change in each investor’s estimation of every other investor’s
estimation, and the more the market goes up. That’s how the Sentiment game works.
How do we “see” a crowd in financial markets? Through the financial media outlets that are
ubiquitous throughout every professional investment operation in the world – the Wall
Street Journal, the Financial Times, CNBC, and Bloomberg,etc. Now suppose one of these
media outlets try to pump the value of a particular stock through misleading information and
misuse of their reach ?
 What Is Pump-and-Dump?
Pump-and-dump is a manipulative scheme that attempts to boost the price of a stock or security
through fake recommendations. These recommendations are based on false, misleading, or
greatly exaggerated statements. The perpetrators of a pump-and-dump scheme already have an
established position in the company's stock and will sell their positions after the hype has led to
a higher share price.
The pump-and-dump scheme formed the central theme of two popular movies: "Boiler Room"
and "The Wolf of Wall Street." Both of these movies featured a warehouse full of telemarketing
stockbrokers pitching penny stocks. In each case, the brokerage firm was a market maker and
held a large volume of shares in companies with highly questionable prospects. The firm's'
leaders incentivized their brokers with high commissions and bonuses for placing the stock in as
many customer accounts as possible. In doing so, the brokers were pumping up the price
through huge volume selling.
Once the selling volume reached critical mass with no more buyers, the firm dumped its shares
for a huge profit. This drove the stock price down, often below the original selling price, resulting
in big losses for the customers because they could not sell their shares in time.

Pump and Dump Demonstration: AGT_Project.ipynb - Colaboratory (google.com)

 Some Examples from the Past……..
Well Pump and Dump is not fictional and to show that we bring some evident examples from the
past, not just limited to penny stocks or blue chip stocks, the cryptocurrency market has become
the newest arena for pump-and-dump schemes. The massive gains made by Bitcoin and
Ethereum have kindled tremendous interest in cryptocurrencies of every stripe. Unfortunately,
cryptocurrencies are particularly well-suited for pump-and-dump schemes because of the lack
of regulation in the cryptocurrency market, its opaqueness, and the technical complexity of
cryptocurrencies.
Elon Musk
In February of last year, Tesla announced it had purchased $1.5 billion worth of the
cryptocurrency with its balance sheet capital and furthermore that they would
soon accept Bitcoin as payment for its vehicles. That announcement sent the
crypto markets into a frenzy driving a number of cryptocurrency prices up and
cementing Musk as a de facto crypto leader
Later, when he suddenly announced that they were abandoning plans to accept
crypto payments, much of that goodwill with the community was reversed. The
company’s selloff comes after a steep decline in the price of cryptocurrencies
across the board, including both Bitcoin and Dogecoin, which Musk has personally
supported in his social media postings and in his position as CEO of Tesla.
The Squid Game
No. I’m not talking about the popular Netflix show. I’m talking about the Squid Game
(CCC:SQUID-USD) token, modeled after the show, which soared 14,300,000% in a single
week – and then dropped to zero in a matter of seconds.

In order to sell Squid Game token, you needed to acquire marbles, which were impossible to
acquire because the mechanism by which you acquire marbles – playing the games – hadn’t
even launched.
The token on Tuesday, Oct. 26, 2021. It was trading around 2 cents. On Nov. 1, 2021, it hit a
high of $2,861.
 Conclusion
It is pretty evident that stock market is a sentiment game where our knowledge of type of the
other players depends a lot on the sentiment of the market. Influential people and groups can
manipulate us in choosing the strategy that will affect our payoffs (loss) even if we play as
rational decision makers that game theory dictates us to.
References

● Game Theory and the Stock Market (youthpolicyreview.com)

● Pump-and-Dump: Definition, How the Scheme is Illegal, and Types
(investopedia.com)
● Keynesian beauty contest - Wikipedia
● Rush orders during a pump and dump scheme. | Download Scientific Diagram
(researchgate.net)