The Prisoner’s (Hedge Fund) Dilemma

September 26, 2013

SAC Manager Arrested for Insider Trading at Hedge Fund

When your focus is strictly on making money (not serving a larger, more selfless purpose), the rules seem to be more like guidelines and ethics is simply a class you took in college.

Most businesses actually produce something. If you speak to most hedge fund managers, they will tell you what they create is efficient markets. Their compensation depends on their ability to wipe out companies, lay off large numbers of workers, and sell off assets. When they’re not working on efficiency, they try to produce wealth from wealth. The payoffs hedge fund employees are real, but the business has the feel of a game.

Back in March, one SAC Manager (Michael S. Steinberg) reportedly had insider information on Dell and used it to trade securities. He arrived at this information from one of his employees, who gave him up after his arrest. In a culture of rule-breaking or rule-skirting, hedge fund employees usually maintain silence. They follow the game theory as outlined in the Prisoner’s Dilemma–where as long as both prisoners accused of a crime stay silent, they both receive the least punishment. In the Prisoner’s Dilemma, though, the worst outcome arrives when you maintain silence and the other prisoner sells you out. The indictment of SAC as a whole in July suggests that once one prisoner has been sold out, group silence becomes much more difficult to maintain. The game may be up for SAC.



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