Game Theory

November 21, 2023 - Around 2 mins mins to read

Understanding Game Theory

Game theory, which was developed by John von Neumann, is a widely-used theory in the field of economics. It offers a simplified interactive environment, referred to as a “game,” that enables researchers to create models of how individuals and entities will react to specific actions.

Illustrations of Game Theory

One well-known example of game theory is the prisoner’s dilemma. This particular game involves participants who have both a zero-sum incentive to harm each other and a non-zero-sum incentive to avoid causing harm. The prisoner’s dilemma serves as a thought experiment that represents a two-person non-cooperative variable-sum game.

Game theory can also be applied to the digital assets marketplace. For example, the Bitcoin market can be viewed as consisting of two types of investors: holders (long-term investors) and opportunists (short/medium-term investors). Holders typically make purchases during periods of low volatility, while opportunists enter the market with the intention of triggering volatility. Each type of investor employs different strategies based on the behavior of the other group. By applying game theory in this context, it becomes possible to observe how these two groups react and respond to each other, ultimately influencing the overall value of BTC.

Author: Gunnar Jaerv is the chief operating officer of First Digital Trust, a technology-driven financial institution in Hong Kong that supports the digital asset industry and serves financial technology innovators. Prior to joining First Digital Trust, Gunnar founded several tech startups, including Peak Digital in Hong Kong and Elements Global Enterprises in Singapore.