Game Theory
Game theory is the study of choices and outcomes used in many disciplines including mathematics, finance, economics, and DeFi. It provides tools for analyzing situations that are interdependent- meaning each participant considers an opponents choices in formulating a strategy. Game theorists study the rational decision-making of each player rather than by pure chance. (R1)
Terms commonly used in the study of game theory (R2):
- – Game: Any set of circumstances that has a result dependent on the actions of two of more decision-makers (players).
- – Players: A strategic decision-maker within the context of the game.
- – Strategy: A complete plan of action a player will take given the set of circumstances that might arise within the game.
- – Payoff: The payout a player receives from arriving at a particular outcome. The payout can be in any quantifiable form, from dollars to utility.
- – Information set: The information available at a given point in the game. The term information set is most usually applied when the game has a sequential component.
- – Equilibrium: The point in a game where both players have made their decisions and an outcome is reached.
Examples:
- – Jury selection
- – Counter-Party Risk
- – Product and service pricing
- – Business and military strategy
- – Equities and commodity trading
- – The behavior of animals in the wild
References:
R1: https://www.britannica.com/science/game-theory/Two-person-constant-sum-games
R2: https://www.investopedia.com/articles/financial-theory/08/game-theory-basics.asp
https://www.pbs.org/wgbh/americanexperience/features/nash-game/
Chess Picture: Photo by Hassan Pasha on Unsplash