Game theory holds a vital importance in stocks’ analysis due to it wide applications. As we know that stock exchange is a complicated and a dense place where theories of almost every field apply e.g., finance, mathematics, management, marketing, psychology, philosophy, political science, international relations, economics, meteorology, literature and many others. Hence the list is infinite. Now the question is,” why game theory is important?”. Answer is very simple, “Game theory applies almost everywhere since it is a multidimensional theory”.
It basically belongs to the origin of mathematics. It aligns a model that figures out the inherent uncertainty. In the game theory, we have to study uncertainties which are drawn by rational bodies which are a sort of educated ones rather than the events that are not foreseeable. It observes the price screening policies and fluctuations and draws the areas to handle them rationally. Normally probability theory and game theory are used side by side in order to minimize risks and effective decision making. Every theory has its important application. Even though, sometimes investors are found exercising them unconsciously because they do not have the theoretical knowledge of the respective theory. Here we have a list of important reasons for what the game theory is important for stock traders.
- Risk management
Investors may need to mitigate the risk associated with the stock trading. Game theory may work for them because it helps to make a pool of educated inferences over the market. It is different from market probability theory because of systematic occurrence of expected events. Unlike probability theory, we do not only rely over the calculations and their interpretations. It takes all stakeholders and participants into consideration to make a reliable inference.
- High Profitability
Plunging into the game theory may ensure higher gains due to better decisions. If an investor remains successful to lucratively implement the inferences, he or she can better be able to make better returns than the competition. Thus the chances of becoming a bear are automatically increased.
- Market Corrections
Whenever the market gets a bubble created, game theorists make it correct and in the mean time they get a chance to earn profits as well. However this is exercised consciously and unconsciously because market cannot stay on disequilibrium position for longer time period. External forces compel it to get back. Through wide exercise of the underlying theory, there are lesser chances to observe overvalued and undervalued shares.