Prisoner’s Dilemma with Asset Managers
The concept is asset ownership is extremely important for the outcome of a company. Strictly defining who is responsible for each document and service and other necessary details make sure that each asset is protected and properly taken care of. The management of the assets, usually a client’s investment by a bank or similar financial service company, plays an equally important role for the individual, thus the necessity of asset managers. The key distinction between the owners and the managers is that for managers, performance is based on their peers.
During times of financial instability, his results in a “Prisoner’s Dilemma” like situation between the asset managers and owners. The asset managers are given two choices: keep the assets or sell. For the asset owners, they hope that either all managers hold onto their assets, or try to minimize the selling of assets. If some of the manager sells and others don’t, the ones who kept the assets take the losses. So, it is in the best interest for the manager to sell, despite what other managers do. This is similar to the Prisoner’s Dilemma, where it is best for player 1 to confess, despite whether or not player 2 confesses. If some mangers sell and other’s don’t, then those who kept the assets are at a loss. If all managers sell, everyone is at a loss. But, in the latter situation, the manager will perform at least as well as all of his/her peers.
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