Chess Applications: The Theory of Steinitz

Besides being great as a means of personal development there are some interesting applications of ideas developed at the chess board. One of the most universal of these was Steinitz’s principle of proportion.

The former World Champion and father of modern chess strategy stated that the attack must be in proportion to the amount of advantage held, so a big advantage means that you can go in all guns blazing, a small one means modest pressure is better. Besides preventing chess players from overplaying their positions this insight can help in many other spheres.

The area which most readily comes to mind is that of financial markets, many traders and hedge funds failing not because they were right or wrong but simply through having overplayed their hand with excessive leverage. One can be quite right on overall direction, but excessive leverage means that you can be forced out of a position before it finally goes in the direction that has been predicted.

It could well be that this is a major factor in the public losing money in stocks as well. The cause of public selling is commonly attributed to the fear caused by falling prices, but perhaps there’s a heavy leverage element in there as well. During the good times people will often have a surplus and will think about saving for the future in a rising asset class. But when a downturn arrives increasing pressure on the necessities of life (induced perhaps by a drop in income) forces them to sell these investments.

Where Steinitz’s theory really kicks in is when someone is heavily leveraged in investments such as housing, their ‘attack’ being way out of proportion to the perceived advantage (rising prices). When the denouement comes their position can deteriorate at a horrifying rate, for example being a modest 3 times leveraged (owning £50k of a £150k house) means that a 15% adverse move in housing causes a 45% loss in net worth.

Obviously this is much worse in the case of a ‘buy to letter’ who has several properties based on a 5% deposit. Even if they’re tenanted they will be losing money as long as the mortgage is higher than the rental yield. The situation may not be too bad as long as they can support the cash bleed with their salary and the properties are fully occupied. But take one of these supports away and the position can rapidly implode.

This is why I’d make ‘Lasker’s Manual of Chess’, which explains these things, compulsory reading at schools throughout the land. There’s a lot more to chess than 30 moves of Dragon theory…