Quantum Strategy Pays Off in Real Quantum Computer Financial Games
According to a recent study, quantum computing can provide traders a quantifiable edge by outperforming traditional techniques in trading settings that resemble games and generating larger payouts in market simulations conducted on a functional quantum machine.
Researchers from North Carolina State University, Duke University, the University of Maryland, and startup Tactics showed in a recent study published in Quantum Economics and Finance that quantum game theory can produce better results in strategic scenarios that mimic actual trading, something that classical models frequently fail to do. Using an ion-trap quantum computer, the team created quantum versions of well-known games, including Chicken and Prisoner’s Dilemma.
According to the researchers, the findings support a long-held hypothesis: in situations where cooperation and conflict clash, quantum techniques can outperform classical ones.
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The Quantum Referee
Utilizing entangled quantum bits, or qubits, that are coordinated by what the researchers call a “quantum referee,” provides the benefit. The quantum form of game theory provides strategic correlations that are impossible to create with standard randomness, as opposed to players making decisions on their own, as in classical game theory. Higher payoffs resulted from these correlations, including experimental evidence of a quantum advantage in scenarios inspired by the market.
The researchers write, “The traders/players realise a better paying Nash equilibrium and heed the advice of a quantum referee even when it is provided probabilistically.”
Quantum Tactics and Classic Games
The researchers started by projecting trading methods onto straightforward two-player games, such as purchasing low and selling high (also known as “going long”) or placing a wager on a price decline (often known as “going short”). For instance, two players each have to decide whether to collaborate or defect in the famous Prisoner’s Dilemma. In a traditional arrangement, even if both would benefit more from cooperation, it makes more sense for both to defect.
This is comparable to two hedge funds choosing to short a stock in trading, which lowers the stock’s price and reduces long-term returns.
However, the experts note that shorting has a high risk. Because there is a greater chance of a short squeeze, a scenario in which increasing market prices compel short sellers to cover their positions, pushing prices even higher if both traders choose to go short, their profits are capped at one each. However, when these sensible decisions are implemented, the Nash equilibrium that results is precisely (Short, Short), meaning that each trader only receives a payout of 1.
As background, the Nash equilibrium is a stable position in classical game theory where no player can act alone to enhance their outcome. It’s not always the best outcome, though.
The team claims that this is where the quantum twist enters the picture.
The team substituted entangled qubits for coin tosses, drawing inspiration from previous research on quantum games, such as a 1999 model called the Eisert–Wilkens–Lewenstein (EWL) protocol. The EWL protocol introduces a unique type of correlation between players through the usage of two entangled quantum bits. Players manipulate qubits using unitary gates, which are mathematical operations that represent strategic actions, as opposed to choosing between “long” and “short” at random.
A quantum logic gate is used to entangle the participants’ qubits at the start of the game, creating a shared initial state. The opposite quantum gate is then used to reverse the entanglement once each player executes their selected move on their qubit. The outcome, when quantified, dictates the participants’ moves and rewards. Essentially, both players receive simultaneous “advice” from the quantum referee, and the entanglement facilitates greater coordination of their decisions without the need for direct contact.
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Confirmed on an Actual Quantum Device
The group played the game on a linear ion-trap quantum processor constructed at the University of Maryland to test the idea. The device performs quantum logic operations by manipulating ytterbium ions that are trapped in a chain using lasers. To mimic the choices made by players, a sequence of gates acts upon each qubit after it begins in a known state.
In one version of the game, the researchers permitted one trader to change their quantum settings while fixing the strategy of all other traders. The result? In the quantum version of the game, a Nash equilibrium was demonstrated by the peak payouts that occurred when all traders employed the suggested quantum strategy.
Even when the game was extended to accommodate up to six participants, this outcome persisted. The research team observes that gate mistakes rise when more participants sign up and the number of necessary quantum gates increases. However, the quantum strategy’s structure is unaltered, suggesting that it is scalable.
Implications for the Real World
Potential real-world applications, according to the researchers, include carbon trading and other markets where competition and cooperation must be balanced. If players overdo shorting tactics in these “green markets,” traditional procedures may cause price instability. In contrast, quantum techniques might promote more consistent, cooperative actions.
When only one trader employs a quantum approach and the other exclusively employs classical trades, the results are somewhat unexpected. In that scenario, the conventional trader might receive nothing, whereas the quantum trader could regularly receive a larger payout. This gives early adopters a clear incentive.
As previously indicated, the paper also makes reference to earlier work in quantum economics, including models in which quantum entanglement is figuratively understood as a form of mutual social or psychological contract between participants. According to the authors’ more technical understanding, “quantum entanglement” might result from shared data that is fed by a network of quantum computers that are trading.
Restrictions and Unanswered Questions
Although the results are encouraging, the researchers admit that allowing players to employ an unconstrained set of quantum techniques reduces the quantum advantage. Players can create potent counterstrategies that negate the advantage in these more general situations. However, when strategies are randomised, or what the authors refer to as “mixed quantum strategies,” the advantage reappears.
Additionally, the study makes no effort to replicate a real financial market. In order to test the central hypothesis that quantum correlations can alter strategic outcomes, the models are stylised, abstract representations of trading behaviour.
It is also accountable for the fact that there is still a shortage of quantum gear. Scaling to dozens or hundreds of players would require more reliable platforms, although ion-trap computers can manage tiny numbers of qubits with excellent fidelity.
