She discovered that technical trading parallels a classic problem known in game theory as the Prisoners' Dilemma. It involves two prisoners who are interrogated in separate rooms. The best outcome is if neither confesses, because both then get light sentences. If one prisoner confesses and the other doesn't, the confessor goes free while the book is thrown at the other prisoner. The worst outcome is if they both confess, since both will wind up in jail for years. Although the best collective outcome is for both to stay quiet, each prisoner can gain as an individual by confessing. So unless the prisoners can find a way to bind one another to remain silent, the only rational outcome is for each to confess, which makes them each worse off than if they had both remained silent.

By applying the ideas from game theory to her stock market model, Joshi found that the result of technical trading "is like a multi-person Prisoners' Dilemma." Though everyone would be better off by avoiding it, there is too much incentive for investors not to engage in technical trading. And once everyone starts to do it, the market becomes more volatile and harder to predict, thus lowering returns for all investors. In this way, she concluded, "the market is driven to an inferior equilibrium." Although it is always profitable for each individual investor to use technical trading, the combined effect of everyone doing it has a pronounced overall negative effect on the market.

"If we could somehow keep everyone from being technical traders, then we'd all end up with more money," she said. "But the reason people do it is that it's profitable," and that "may explain why it is becoming increasingly popular in financial markets."

For this and other work she did while at Reed, Joshi received two coveted awards: She was chosen as one of two Class of ’21 scholars in the graduating class, for "creative work of notable character," and she was also named the first recipient of the Gerald M. Meier Award for Distinction in Economics, a new award created by Gerald Meier ’47, who is professor of international economics at Stanford University. Meier also received the Class of ’21 award while a student at Reed.

Raised in Jaipur, a city in northwestern India, Joshi is the only child of parents who operate an Indian handicraft business. Originally, she said, she wanted to be a classical Indian dancer, but she "wasn't encouraged" to do so at her intensely academic high school.

It's important to keep in mind that Joshi's model is a theoretical one that has not been tested against actual stock market behavior. She could spend the next 20 years applying her findings to the real world, but she has more immediate plans. Last summer, she presented her thesis at the Artificial Life Conference in Los Angeles, the only undergraduate to do so. She also intends to shorten her thesis into a much briefer version for submission to an academic journal and eventually to pursue a Ph.D. in economics.

Meanwhile, her thesis advisers say her work is significant. "It's easy to imagine that one day there may be conferences on the ‘Joshi effect,’ and her thesis could be cited thousands of times," said Parker.


Deborah Rankin is a financial writer whose work regularly appears in the New York Times.







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