Decision making is the fuel that runs the engine of game theory, without decisions being made among numerous parties game theory would cease to exist. When exploring the topic of game theory the understanding of decision making processes and their outcomes can lead to all sorts of interesting and compelling scenarios.
Game theory provides a framework by which the study of decision making can be utilized to benefit particular goals of closed systems. When a desired goal is defined, parameters that limit a participant's actions can be established to benefit the goal but also the participant. When individuals are confronted with limitations they must work within, possible outcomes can be calculated and studied. Once possible outcomes have been mapped, a loop of interaction can be created to steer those decisions towards the goal.
Principles of Game Theory
When it comes to game theory there are 5 main principles that need to be present for the application of game theory to be valid.
- The game needs multiple players (more than 2)
- The players within the game need the ability to interact with each other
- The players within the game act rationally
- A reward needs to be present for players
- Players act according to personal self-interest.
When these factors are present within set parameters the possible outcomes of a scenario can be established and studied.
The Prisoner's Dilemma
The most well known example that illustrates the importance of decision making as it’s relative to game theory is that of the Prisoner’s Dilemma. This classic example was put forth by American Mathematician Albert W. Tucker.
This example follows the decision making process of 2 individuals who act out of their best interest rather than cooperating with each other, leading to a worse outcome than if they had cooperated with one another.
- If Prisoner A and Prisoner B confess to the crime, each of them will serve 2 years in prison.
- If Prisoner A confesses and Prisoner B remains silent Prisoner A will be set free and Prisoner B will serve 3 years in prison, and vice versa.
- If both Prisoner A and Prisoner B remain silent, both of them will serve one year in prison.
Depending on the circumstance, cooperation with the established rules may or may not result in the best outcome.
Socrates Soldier Realization
Even Socrates touched on the notion of game theory in an example that involves a soldier coming to a powerful realization when on the front lines of a battle.
If the army's defence is successful, the soldier still runs the risk of dying. However, if the army's defence is unsuccessful the odds of the soldier dying are almost certain. In this moment the best possible decision for the soldier acting out of their own self interest would be to run away, as regardless of the battles outcome, their safety would be ensured.
This example taken to an extreme would be to apply this realization to all the soldiers simultaneously on the front lines right before a battle resulting in all soldiers simply choosing not to fight in the first place.
Game Theory in Retail
Many of us are already familiar with how the retail market works but no example illustrates the use of game theory in retail as well as Black Friday, the annual sale that takes place known best for its discounts of electronics.
When retailers attempt to attract customers with heavily discounted items they are in direct competition with similar retailers selling the same products at similar prices. Consumers then have a choice between numerous retailers for the same product at a comparable price. Retailers will attempt to gain an advantage over their competitors by heavily undercutting the price of an item in order to attract more customers. Even at a discounted price the number of units sold at a discounted price can equal to more profit overall.
Game Theory Application in Sigmadex
It's plain to see that the application of game theory is relevant to nearly any process that involves 2 or more people making decisions that affect one another's outcomes.
As it applies to Sigmadex, game theory and the study of its relevance to DeFi allows for a unique ecosystem where the actions of individuals contribute to the distribution of rewards and penalties as dictated by the protocol. We've used game theory to determine not only the best interest of users, but also the most advantageous system for the ecosystem to operate on based on how users would decide their actions within the protocol. Even with community governance, the core mechanisms of the protocol will still function benefiting the platform as a whole.