Global game theory uses statistical models to predict economic crises and their effects on large systems. It is an incomplete knowledge format where participants do not have full information about each other’s actions. It is mainly used to predict financial crises and prevent or capitalize on instabilities. A common example is predicting bank foreclosures.
A global game is a situation where operators are working on a large scale and making decisions that influence each other without knowing the full effects of those actions beforehand. The global game 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 runs or bubbles. Along with predictive models, these theories contain methods to bring these situations back to a reasonably stable state.
Game theory is a very advanced method of creating statistical models. In these games, a situation is presented in which a player’s actions influence the success or failure of one or more players. Actions and their consequences are statistically mapped so that the full effect of an action can be followed by others to completion. Using these models allows researchers to find the true cost of actions, even seemingly innocuous ones, in a large system.
While there are a large 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, information known to the various participants does not extend to other players. A participant may know the full ramifications of his own actions, but he does not know the ramifications of other players. In fact, he may not be aware of the other players’ choices or even their existence.
The use of global game theory is mainly restricted to financial crises. The models created by these experiments can predict the likelihood that a company, industry or even a country will experience a sudden decline in production or a financial meltdown. By using these models, investors can help prevent or capitalize on instabilities before they happen. This will either protect investments or allow the handlers to profit from the outages.
A common example of global game theory is predicting bank foreclosures. A bank run is when a group of people become fearful of a bank’s ability to pay back deposited money. When these people try to leave the bank, it creates fear among other members and they start to withdraw their money. This panic spreads until the bank collapses under the weight of withdrawals. The important thing to note is that the bank may not have been in trouble beforehand – it was the panicked actions of the people that caused the crash.
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