The Prisoner’s Dilemma of Markets

In Game Theory the prisoner's dilemma is a paradox in decision analysis in which two individuals acting in their own self-interest pursue a course of action that does not result in the ideal outcome. The typical prisoner's dilemma is set up in such a way that both parties choose to protect themselves at the expense of the other participant. As a result of following a purely logical thought process, both participants find themselves worse off.

Markets being the zero-sum games they are, hardly make any exception, and even give a perfect example of how prisoner’s dilemma works in practice. We just saw something few people had expected – a simultaneous crash of both equity and crypto markets. As inherently risky assets as they are, they used to be uncorrelated. This may have been one of the primary reasons many hedge funds entered the crypto space on the first place, besides the prospect of outsized returns in the ‘new normal’ economic environment of close to 0 interest rates. Crypto markets used to be uncorrelated to all traditional asset classes because the set of players there was different. Now, it seems that the sets of major players in both crypto and equities largely overlap and in a risk-off moment they just dumped all risky assets driven by their survival instincts. Human nature never changes, and this is what creates bubbles, booms & busts… this is the everlasting cycle of markets and life.