Global game theory uses statistical models to predict economic crises, such as bank runs, and their effects on a large system. It is a subset of game theory that deals with incomplete knowledge formats, where participants do not know the actions or existence of other players. The use of global game theory is mostly limited to financial crises, and models built from these experiments can help investors prevent or capitalize on instabilities before they occur.
A global game is a situation where agents work on a large scale and make decisions that influence each other without knowing in advance the effects of those actions. Global play is a subset of game theory and, therefore, exists primarily as statistical models, social trends, and predictive algorithms. In general, global game theory is used to predict economic crises, such as bank executions or bubbles. Along with predictive models, these theories contain methods for bringing such situations back to a state of reasonable stability.
Game theory is a very advanced method of creating statistical models. In these games, a situation is presented where one player’s actions affect the success or failure of one or more other players. Actions and their consequences are statistically mapped so that the full effect of an action can be followed through to other people until it is completed. Using these models allows researchers to find the true cost of actions, even those that seem harmless, on a large system.
While there are a huge number of game types, most are defined by the amount of knowledge possessed by the various participants. The global game is an incomplete knowledge format. In this case, the information known by the various participants does not extend to the other players. A participant may know the full ramifications of their own actions, but not know the ramifications of other players. In fact, he may not be aware of other players’ choices or their existence.
The use of global game theory is mostly limited to financial crises. Models built from these experiments can predict the likelihood of a company, industry, or even a country experiencing a sudden drop in production or a financial crash. Using these models, investors can help prevent or capitalize on instabilities before they occur. This will either protect investments or allow manipulators to cash in on breaks.
A common example of global game theory is predicting bank runs. A bank run is when a group of people fear a bank’s ability to repay money deposited. When these people try to withdraw from the bank, it generates fear among the other members and they start withdrawing their money. This panic spreads until the bank crashes under the weight of withdrawals. The important thing to note is that the bank may not have been in trouble previously – it was the actions of panicked people that caused the crash.
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