Enough Information from a Central Banker may not be a Good Thing
Source: http://www.sciencedaily.com/releases/2011/10/111010074840.htm
In this article, an economic expert believes that in the world of banking, it is optimal for a central banker to be vague about his views on trading.
Chris Wallace, who is a economic professor of the University of Leicester says bank chefs who provide “something in between full information and no information” on current economic conditions are employing the best tactics to help financial stability.
Let’s assume a central banker gives enough information to a trader, since the opinions from the banker will strongly influence the market, the trader will risk to follow that information because that will bring him a good profit. However, this full information from the chief will lead the trader in a wrong way. The trader will follow the information blindly and hence disregard other good sources of private information.
In another case, if the chief doesn’t give any information to the trader, he will definitely lose a very good source which is more likely to help boost the profits.
We can think of this trading information tradeoff as a game. As indicated in the diagram below.
| Trust Other Sources | Distrust Other Sources | |
| All Information | 10, 0 | 10, 1 |
| Some Information | 7, 5 | 7, 1 |
| No Information | 1,8 | 1,3 |
The left-side label indicates the options of the chief banker, which may provide all the information, some information and no information. The top label indicates the options of the trader: choosing to trust other private sources or distrust other sources. The content in the table is the profits gained from respective sources. In our trading game, our goal is to maximize the sum which is the total profits of a trader.
If the chief provides all the information, trader will have a larger profits from this side (say 10). However, he is much more likely to distrust other sources. Therefore, disregarding other sources will help the trader save more cost and hence has a little higher profit expectation than trusting other sources.
If the chief provides some information, the trader won’t get profits as high as 10, but he still can get a quite good profits (say 7). In the meantime, he will put more faith on other sources and this brings him more profits from the side of other sources.
If the chief provides no information, the trader will certainly get a profit of 0 from the source of the central banker. And this time the trader will put more efforts on other private sources and the profits from this side is slightly higher.
As we can see from the table, the Nash Equilibrium is (Some Information, Trust Other Sources). The argument shown above may not be very strict, but by applying game theory, it can show a general idea about how the central banker should do regarding his trading opinions.
– Vincent-jk