Game theory applications in Financial Markets
In financial markets, game theory provides a powerful framework for understanding the complex behaviours that emerge from the decisions of many independent but interdependent players.
Game theory is the study of strategic decision-making - how individuals interact and compete in situations of conflict and cooperation. In financial markets, game theory provides a powerful framework for understanding the complex behaviors that emerge from the decisions of many independent but interdependent players. Every day on Wall Street, investment funds, traders, regulators, and companies are all engaged in strategic interactions as they attempt to outwit each other and maximize their own returns.
Game theory gives us tools to cut through this complexity and model how rational players should act given their incentives, information, and beliefs about how others will respond. By representing financial scenarios as "games" and deriving equilibrium strategies, we gain valuable insights into pricing dynamics, risky trades, regulatory oversight, and more. In this article, we will explore how the logic of game theory is profoundly shaping many areas of today's financial world.