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Game Theory On

In last week’s innovation, my colleague Robert highlighted the risk of Iran being increasingly drawn into the Middle Eastern conflict. Following the launch of around 300 Iranian drones and missiles, he has been proven correct.

The vast majority of those did not find their targets. Nonetheless, Iran attacking one of the United States’ closest allies is a scary thought. While Iran says it is not planning another attack, if Israel chooses to reply with violence, it has clearly stated its own response will be swift and decisive. With these words ringing in their ears, leaders across the world, including Israel’s old ally the US, have urged Benjamin Netanyahu not to strike back in order to prevent a terrible escalation.

In coming up with this recommendation, and indeed all foreign policy decisions, Biden’s team will have been furiously working on modelling scenarios. They need not only to think of the reaction of Iran, but also what any next steps will do to move the dial on markets (both stock and commodity), public opinion (all the more important in an election year), their relationship with allies and a million and one other factors. The kind of ‘What if?’ analysis that would make Gary Kasparov’s brain hurt.

Of course, this type of analysis is nothing new. The original textbook on strategic decision-making, The Art of War, can be traced back at least a few centuries BC. Today, there is a whole branch of economics devoted to it. It’s called Game Theory. It is a fascinating and incredibly important field, and the dispassionate analytical power of AI means it is evolving at pace.

For example, self-driving cars utilise game theory to make decisions. They are still some way off widespread commercial use, but there are already numerous areas where AI already helps create better, more efficient outcomes in transport. When finding the best way from A to B, Google Maps analyses the available information (traffic levels, available routes etc) and finds the best likely outcome. On that journey, the latest cars can continuously monitor their surroundings using a network of cameras, ultrasonic sensors, and radar. They might even park themselves on arrival. The net effect is our passenger arrives safer, and faster.

The potential of the next wave of AI is extraordinary. Think about what it can do for scientific research. Part of the reason many drugs are so expensive is that pharmaceutical companies need to cover their costly and risky R&D projects. Improving efficiency here can not only speed up research, it can materially reduce the cost of treatment. And that’s before we even talk about improving diagnostics.

The implications for corporates are just as big. Just as Kasparov was felled by a supercomputer in 1997, in the future AI-powered decision-making could take a leading role in everything from R&D to M&A. Better capital allocation could lead to higher profitability, which would be no bad thing for company valuations. Still, there’s a long way to go yet. It may be exciting, but the impact of AI on the world is still largely unknown.

With that in mind, we’re not changing how we think about investing client money. We aim to seek out and invest in high quality operators that have proven adept at adapting to change. We look for balance sheet strength, desirable products, and outstanding leadership.

In fact, those leaders can often be more useful than the never-ending noise that comes from many financial commentors. Blackrock and JPMorgan both released results on Friday. With a collective 54 years at the helm two of America’s biggest financial institutions, we think Jamie Dimon and Larry Fink are worth listening to.

Both have thought (even when it was unpopular to do so) and still think inflation will prove slightly stickier than the Fed would like. Fink thinks (easy for me to say) that won’t stop the Fed cutting rates this year, and is hopeful that stability will encourage money into the market. Dimon is similarly optimistic, although highlights that the full effect of quantitative tightening is as yet unknown, and so it is important to prepare “for a wide range of potential environments to ensure that we can consistently be there for clients.”

In my opinion, that last sentence nicely sums up what we’re trying to do here too.

George Salmon – Senior Investment Analyst

All charts and data sourced from FactSet

Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority ( with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The editorial content is the personal opinion of George Salmon, Senior Investment Analyst. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. Currency exchange rates may affect the value of investments.

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