What Is Game Theory?
Game theory is a field of study that analyzes strategic interactions and decision-making between individuals in situations where the outcome depends on the choices made by each actor. It is usually based on the assumption that everyone is rational and seeks to act in their own best interests to maximize their own benefits.
This means that they will try to maximize their own chances of winning and minimize the chances of losing. It can help us understand why people make the choices they do and predict what choices they are likely to make in future situations. As a result, it can be used to analyze any situation where two or more people are making decisions.
Game theory is also known as “zero-sum theory” because it assumes that there is a fixed amount of resources available (such as points in a football game, an olympic gold medal, or bitcoin in a block) and that one player’s gain will always come at the expense of another player. This type of theory is most often used in circumstances where two or more players are competing for a limited resource.
An “optimal” decision is one that leads to the greatest benefit for the player making the decision, given the other player’s choices.
Game theory can also be used to analyze situations in which people cooperate with each other, such as in business partnerships or treaties between nations. In these cases, game theory can help determine how to best achieve the desired outcome, such as maximizing profits or minimizing losses.
Game theory can also be used to study situations where players are not fully rational, such as when they are emotional or when they have limited information.
Win-Lose: Zero Sum Gain
One of the most important concepts in game theory is the idea of a zero-sum game. This is a situation where one person’s gain is exactly equal to another person’s loss.
For example, in a game of poker, if one player wins $100, then the other player must lose $100. In a game of chess, one player must capture the other player’s king. In a zero-sum game, there is no way for both players to win; one player must always lose (or force a stalemate). Game theory can be used to analyze how people compete in these sorts of circumstances.
Win-Win: Sum Gain
In any negotiation or dispute, it is common for each party to focus solely on their own interests and needs. However, a win-win or sum gain scenario both parties achieve a positive outcome and neither party is at a loss. This approach fosters a spirit of cooperation and collaboration. By cooperating, both parties can benefit from the outcome. A win-win approach also allows for innovative solutions to be proposed, leading to a more effective and satisfactory result for all involved. Ultimately, this approach promotes mutual understanding and trust, leading to a healthier, long-term relationship.
Every time you purchase something that you want, you are taking part in a win-win encounter because both you benefit as a buyer as well as the seller.
Bitcoin And Game Theory
Bitcoin and game theory are inextricably linked. In the context of Bitcoin, game theory is used to maintain the balance of incentives between miners and users, ensuring that each participant operates in the best interest of the network. Miners are incentivized to contribute to the security and maintenance of the network through the rewards they receive for producing valid proof of workWhat Is Proof Of Work? Proof Of Work, often abbreviated as PoW, is both the method for achieving consensus across the entire Bitcoin network as well as a piece of.... Users, on the other hand, who use bitcoin as a medium of exchange compete for limited block space and outbid other transactions pending in the mempoolWhat Is The MemPool? The MemPool, short for memory pool, is a short-term database of unconfirmed transactions that is kept by each node. Although the term "MemPool" is frequently used,....
Through game theory, Bitcoin creates a self-regulating ecosystem where incentives are aligned, and the network achieves consensus.
– The Game Theory Of Bitcoin MiningWhat Is Bitcoin Mining? Bitcoin mining is the process of using specialized computers called bitcoin miners to systematically guess a number that completes a math equation. Whoever finds the number... (article in progress)
– The Game Theory Of On-Chain Payments (article in progress)
– The Game Theory Of The Lightning Network
The Prisoner’s Dilemma
One of the most famous examples of game theory is the prisoner’s dilemma. In this scenario, two prisoners are each given the choice to betray or cooperate with the other prisoner. If both prisoners betray each other, then they will each serve a long prison sentence. However, if one prisoner betrays while the other cooperates, then the betrayer will go free while the cooperator will serve a long prison sentence. As a result, there is a strong incentive for both prisoners to betray each other even though it would be better for both of them if they cooperated.
Game theorists have discovered that the unique Nash equilibrium of this game is for both players to defect, even though this is not in either player’s best interest. This is because game theory is often based on the assumption of zero-sum gain, meaning that any gain by one player must be offset by an equal loss by the other player. In other words, it assumes that players are rational and will always choose the action that gives them the most benefits.
Game theorists have also discovered that real-world gameplay often deviates from the predictions due to factors such as emotions and preferences. As a result, game theory is not always accurate in predicting actual outcomes.
The Evolution Of Trust
In a game theory experiment titled, The Evolution of Trust, you can learn how trust is managed against different characters that you likely encounter in your daily life. Some people behave honestly with you and don’t attempt to cheat or swindle you. Some may simply treat you the same way that you treat them while others may always try to swindle you no matter how well you treat them.
While this is only an experiment for learning and experimenting, it may prove to be a valuable tool in understanding human nature and how it relates to Bitcoin.
Additionally, the experiment goes on to show the importance of second chances because we often misunderstand or miscommunicate with each other. Game theory is all around you on a daily basis. You encounter it every time you interact with other people in all sorts of different environments and scenarios.